Retail bankruptcies still low — for now

Despite mounting inflation, robust consumer spending is helping to insulate many companies from the specter of bankruptcy.

Why it matters: As share prices tumble, cracks are beginning to show in the balance sheets of companies that may have been overextended, over-leveraged and off the mark on shifts in consumer behavior during the pandemic.

What’s happening: Only eight companies have filed for bankruptcy protection this year. They include Revlon, Enjoy Technology — which was founded by ex-JCPenney CEO Ron Johnson — and electrical device maker Simply, according to S&P Global Market Intelligence.

Yes, and: Lenders will be on alert. David Berliner, head of BDO’s business restructuring and turnaround services practice, says, “As interest rates rise and inflation starts hurting profitability, the lenders are going to, historically, start to be more restrictive on the company.”

• “You’re going to start to see some companies that get into trouble if they don’t have the liquidity.”
• With lenders tightening their purse strings, distressed companies may turn to alternative lenders to find financing, sell themselves to funds or strategic competitors or restructure their debt, Berliner says.

Driving the news: Discount home goods retailer Tuesday Morning yesterday reportedly tapped Piper Sandler to explore restructuring options, in what could be its second bankruptcy filing in less than two years, according to Bloomberg.

State of play: S&P estimates that the chances of default — which is measured by share price volatility and country and industry-related risks — are an average of 4.5% for publicly traded retailers.

• Those odds are a bit higher in the internet and direct marketing retail segment, with chances of default around 8.1%, S&P says.

What we’re watching: The challenging macroeconomic environment and tighter financing landscape may open the doors for more M&A activity — particularly among over-leveraged, sponsor-backed businesses, Berliner says.

• “Those kinds of deals are the ones to definitely pay attention to because they’re the first to start to get in trouble,” he says.
• Heavily levered deals often limit a company’s flexibility to get additional financing, especially in hard times, he adds.

Yes, but: Still, the data points to strong employment so far, which he believes will “be the cushion that keeps us from having a real rapid downfall.”

• “I just don't see the bankruptcies in a really bad recession coming unless we see the jobs going away,” he says.