Debt Continues to Haunt Ailing Retailers

Debt Continues to Haunt Ailing Retailers

ABI Bankruptcy Brief
ABI Bankruptcy Brief
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September 21, 2017

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Debt Continues to Haunt Ailing Retailers

After Toys “R” Us Inc.’s quick descent into bankruptcy shocked debt traders, investors are picking through an overleveraged industry and asking which other retailers will struggle to harness their debt, Bloomberg News reported today. Apparel and accessories chains such as J. Crew Group Inc., Claire’s Stores Inc. and Nine West Holdings Inc. are already on creditors’ radar because, like the toy retailer, they have large debt loads, looming maturities, and weakening results that could force a restructuring at some point. “There’s room for a lot of shakeout,” said Moody’s Investors Service analyst Charlie O’Shea. U.S. retailers have been under duress for years with the rise of online shopping and new brands winning over shoppers. But the chains with heavy debt — much of it from leveraged buyouts similar to Toys “R” Us — have been able to push off a reckoning because a decade of low interest rates and central bank stimulus have kept credit markets wide open, O’Shea said.
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In related news, the recent bankruptcy filing at Toys “R” Us has roiled the toy industry, but the struggles at the company are not new, according to a Harvard Business Review commentary. The firm was taken private in a $6.6 billion leveraged private equity buyout in 2005, with the aim of turning the chain around, but the resulting debt has proved to be unserviceable. The news is part of a larger trend of closings that some are calling the retail apocalypse. The rise of e-commerce, combined with a shift in consumer preference toward dining out over shopping and with years of overbuilding, has made for distinctly unattractive economics in traditional retail, according to the commentary. Take a closer look, however, and the prevailing narrative isn’t quite what it seems. A number of successful online retailers are becoming increasingly focused on the physical world, for a number of reasons. For example, Amazon’s purchase of Whole Foods gives it a much more comprehensive distribution footprint, which will help it increase the efficiency of its online model. As experts have written about previously, the retail industry goes through a major disruption nearly every 50 years. The rise of urban centers led to department stores. Automobiles created suburbs and shopping malls that gave rise to Toys “R” Us and a wave of category killers and discount stores that arose in the 1950s and 1960s.
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What does the future hold for retail bankruptcies? Be sure to attend ABI’s Bankruptcy 2017: Views from the Bench on October 17.

Analysis: Only About Half of Houses on Puerto Rico Covered by Insurance Policies Protecting Against Wind Damage

Many Puerto Rican homeowners don’t have insurance policies to help with rebuilding in the wake of Hurricane Maria, making the economically depressed island’s recovery more difficult, the Wall Street Journal reported today. Only about 50 percent of houses in the U.S. territory are covered by policies that protect against wind damage, which is far less than is typical across the U.S., according to catastrophe-risk-modeling firm AIR Worldwide. Maria, the most powerful storm to hit Puerto Rico in nearly a century, made landfall on the island yesterday. Puerto Rico is still recovering from Hurricane Irma, which knocked out power in many households. Puerto Rican homeowners without insurance coverage will have to rely on their own money, aid from the Federal Emergency Management Agency in Washington and other public or charitable sources as the island faces what is widely expected to be billions of dollars of damage. On Monday, President Donald Trump approved an emergency declaration for Puerto Rico, opening the door to federal assistance.
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This year’s hurricane season has become one of the most destructive in recent memory. To provide assistance to those affected and direct others in how you can help, ABI encourages you to visit our Hurricane Relief webpage.

Commentary: The Next Crisis Will Start in Silicon Valley

It has been 10 years since the last financial crisis, and some have already started to predict that the next one is near. But when it comes, it will likely have its roots in Silicon Valley, not Wall Street, according to a Bloomberg News commentary. Since 2007, a tremendous wave of innovation has swept across the financial sector, affecting almost every aspect of finance. New robo-adviser startups like Betterment and Wealthfront have begun dispensing financial advice based on algorithmic calculations, with little to no human input. Crowdfunding firms like Kickstarter and Lending Club have created new ways for companies and individuals to raise money from dispersed networks of individuals. New virtual currencies such as Bitcoin and Ethereum have radically changed our understanding of how money can and should work. These financial technology (or “fintech”) markets are populated by small startup companies, the exact opposite of the large, concentrated Wall Street banks that have for so long dominated finance, according to the commentary. By automating decision-making and reducing the costs of transactions, fintech has greased the wheels of finance, making it faster and more efficient. However, it does have its vulnerabilities: Fintech companies are more exposed to rapid, adverse shocks than typical Wall Street banks, according to the commentary. Since they are small and undiversified, they can easily go under when they hit a blip in the market. Consider the case of Tokyo-based Mt. Gox, which was the world’s biggest bitcoin exchange until an apparent security breach took it down in 2014, precipitating losses that would be worth more than $3.5 billion in today’s prices.
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Next Consumer Commission Open Meeting to Take Place Oct. 10 at NCBJ

The ABI Commission on Consumer Bankruptcy will hold a public meeting of the Committee on Case Administration & the Estate during the annual conference for the National Conference of Bankruptcy Judges (NCBJ). The meeting will be October 10, 2017, from 10:45 AM – 1:00 PM PDT in the Paris Las Vegas Hotel, Versailles rooms 1-2. To find out how to participate at the open meeting, please click here.

To access the list of topics under consideration by the Commission’s committees and previous hearing statements, please click here.



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BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: Repealing Crisis-Era Rules Is Asking for Another AIG

Some proponents of repealing crisis-era regulatory reforms argue that higher capital levels offer better protection. More capital is good, but that alone won’t solve every problem, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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