Many have heard of Chapter 11. Fewer have heard of Chapter 22.
If you double the number 11, you get 22, which is why companies making a second trip through Chapter 11 would file for Chapter 22.
This phenomenon is more common than most people realize. As noted by turnaround expert Patrick Walsh of Cedar Croft Consulting, in 2019 Gymboree, Payless ShoeSource and Charming Charlie each filed for new bankruptcy protection within 24 months of emerging from bankruptcy with a plan. reorganization that had been approved by all stakeholders.
But we now live in very different times. With relatively lenient economic conditions continuing — and the resulting lull in retail bankruptcies — are there any prime candidates for Chapter 22 this year? And if not, what other retailers are at risk of making their first-ever trip to bankruptcy court?
Let’s start by looking at which retailers are currently perceived to be most at risk of default. Ben Unglesbee identified several of these retailers in October 2021, in an excellent article that thoughtfully draws on a range of risk indicators, including:
1. STRIKE® scores produced by CreditRiskMonitor
2. Credit ratings assigned by S&P Global Ratings
3. Debt ratings assigned by Moody’s
4. Pricing of credit protection through the Cherokee Acquisition debt put market
5. Rapid Ratings Financial Health Ratings
We will now use a few to guide our analysis.
TO FRISK® Sheet music
CreditRiskMonitor analyzes companies whose shares or bonds are listed on the stock exchange. It assesses the risk of a company filing for bankruptcy within 12 months, scoring companies on a scale of 1 to 10, with 1 indicating very high risk and 10 indicating very low risk.
Some notable high-risk companies on the current watch list are:
Rating of 1: Ritual Aid
Rating of 2: Bed, bath and beyond; Party town; The Real Real; Digital Brands Group
Rating of 3: Express; Torrid
Companies in difficulty generally fall on a score of 1 before filing for bankruptcy. But there are always exceptions. PacSun and Aeropostale had FRISK® scores of 3 when filed in 2016, and Wet Seal had a score of 5 when filed in 2017.
S&P Global’s credit ratings assess a company’s risk of “default,” a term that goes beyond simply defaulting on payment. Sarah Wyeth, head of the company’s consumer, retail and restaurant business, believes the current shortage of Chapter 11 filings will continue through the second half of 2022. “Right now, the retailers are sitting in a really nice place,” she says. As inflationary pressures increase, including high gasoline prices, the pinch of falling real wages will begin to become more pronounced for consumers. She predicts that spending will gradually start to slow and buyers will start to cut spending and squeeze in their pennies a bit. Until 2023, there is a risk that retailers will return to their chronic habit of discounting as their fight for wallet share intensifies.
Belk and 99 Cents Only are the only retailers whose capital structures Wyeth considers the most unsustainable. But she also suggests keeping a close eye on J. Jill.
Moody’s Investors Service released its 2022 outlook for the US retail and apparel sectors in December. Moody’s observed that companies that survived the pandemic “benefited from robust consumption, coupled with supportive capital markets that paved the way for refinancings and lower borrowing costs, enabling to reduce the risk of default.
The companies listed below are currently of most concern.
Other Companies to Watch
Unglesbee, in the article mentioned above, put other companies on their watch list that have not yet been listed. He used additional screening tools, in addition to the three we used. His roster includes Boardriders; Casper; chicos; Farfetch; Neiman Marcus; Talbots; Tuesday morning; and VINCE.
Link this to chapter 22
So much has changed in the world of retail that it seems almost unfair to call it a Chapter 22 situation if a retailer made their first trip to Chapter 11 before 2016. That’s admittedly an arbitrary line in the sand, but that certainly seems fair.
Among the many companies in difficulty already listed, which ones filed between 2016 and 2021? The only two are Belk and Men’s Wearhouse.
Just as it’s not easy for a Major League Baseball team to lose more than 70% of its games, for retailers operating in 2022, it takes a special set of circumstances to necessitate a trip to Chapter 11. C This is even more true if this trip is a round trip.