- Fitch says Sears, Claire's Stores, Nine West Holdings, 99 Cent Stores, J. Crew and True Religion Apparel are among those retailers that have a significant risk of default over the next 12 months.
- High debt leverage and weak operating trends are driving up the rate of default in the sector.
It's only Monday, and the retail sector has already seen a rough start to the week.
Gymboree's filing for Chapter 11 bankruptcy protection has many retail industry watchers wondering who's next. With the record pace of bankruptcies in the industry this year, bankruptcy, for some, is becoming an issue of when the company will file, not if they will.
So far this year, specialty retailers Rue21 and Payless Shoesource are among those contributing to the rising default rate in the sector, Fitch explained.
In a research note Monday, Fitch highlighted its so-called loans of concern list, which includes: Sears Holdings, Claire's Stores, Nine West Holdings, 99 Cent Stores, J. Crew, True Religion Apparel, Charlotte Russe, Charming Charlie, NYDJ Apparels and Vince.
Retailers on the list are considered to have a significant risk of default within the next 12 months.
Taking a look at Fitch's latest list, "a number of these names have been at the forefront of past restructurings," Joshua Friedman, a legal analyst for Debtwire, told CNBC in an interview.
"Struggling retailers need to look at near-term triggers, such as debt that's maturing, interest expense and interest payments coming due," he went on.
High debt leverage and weak operating trends are what drove Gymboree's filing specifically, Fitch said in a statement Monday.
In conjunction with its latest filing with the Securities and Exchange Commission, Gymboree said it has secured commitments for up to $308.5 million in additional financing. The Chapter 11 filing should reduce Gymboree's debts by more than $900 million, the company added.
Gymboree now has plans to shutter some 375 stores, according to court filings. The company currently operates 1,300 stores.
"Fitch's expectation of increasing retail defaults stems from increased discounter (including off-price and fast-fashion apparel) and online penetration, along with shifts in consumer spending toward services and experiences," the credit rating agency said. "These factors have created a highly competitive retail environment and accelerated adverse trends in mall-based shopping."
Just last week, Moody's also issued an updated report saying the ranks of distressed apparel and specialty retailers are growing.
In February, among Moody's rated retail and apparel issuers, 19 retailers had ratings of 'Caa' or lower. That number has now grown to 22 companies, or about 15 percent of the firm's retail and apparel category, Moody's reported.
Among those 22 distressed names are Gymboree — which has now filed for Chapter 11 — Sears, Nine West, Claire's Store, David's Bridal and Charming Charlie. In other words, many of the same retail players on Fitch's watch list.
Moody's lead retail analyst, Charlie O'Shea, has suggested keeping an eye on those 22 names to track which company might file for bankruptcy sooner rather than later. And there's a load of retail debt coming due in 2018, too, he added.
"Many retailers don't have the flexibility to do what they need to do," O'Shea told CNBC.
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