Will Any Retailers File For Chapter 22 In 2022?

Many have heard of Chapter 11.  But fewer have heard of Chapter 22.  

If you double the number 11 you get 22, which is why companies making a second trip into Chapter 11 are said to be filing 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 refiled for bankruptcy protection within 24 months of having exited bankruptcy with a plan of reorganization that had been approved by all stakeholders.    

But we now live in very different times.  With the persistence of comparatively forgiving economic conditions — and the resulting lull in in retail bankruptcies — are there any prime Chapter 22 candidates this year?  And if not, who are some other retailers at risk of making their very first trip to bankruptcy court?

Let’s first start by considering which retailers are currently perceived to be at greatest risk of default.  Ben Unglesbee identified several such retailers in October 2021, in an excellent article that thoughtfully draws on a range of risk indicators, including:

1.     FRISK^® scores produced by CreditRiskMonitor

2.     Credit ratings assigned by S&P Global Ratings

3.     Debt ratings assigned by Moody’s 

4.     Prices for credit protection via Cherokee Acquisition’s Claims Puts market

5.     Financial Health ratings from Rapid Ratings

We’ll use a few of these now to guide our analysis.

FRISK^® Scores  

CreditRiskMonitor analyzes companies with publicly traded stocks or bonds.  It evaluates the risk of a company filing for bankruptcy within 12 months, rating companies on a scale from 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:  

Score of 1:  Rite Aid

Score of 2:  Bed, Bath & Beyond; Party City; The RealReal; Digital Brands Group

Score of 3:  Express; Torrid

Distressed companies typically sink to a score of 1 before filing for bankruptcy.  But there are always exceptions.  PacSun and Aeropostale had  FRISK^® scores of 3 when they filed in 2016, and Wet Seal had a score of 5 when it filed in 2017.  

Credit Ratings

S&P Global’s credit ratings assess a company’s risk of “default”, a term that is broader than merely a failure to make payment.  Sarah Wyeth, the firm’s Sector Lead for Consumer, Retail & Restaurants believes that the current dearth of Chapter 11 filings will continue into the back half of 2022.  “Right now, retailers are sitting in a really nice place”, she says.  As inflationary pressures rise, including elevated gas prices, the pinch of the decline in real wages will start to become more pronounced to consumers.  She anticipates spending will gradually start to slow, and shoppers will begin trading down and pinching their pennies a bit tighter.  Extending into 2023, there is the risk that retailers will revert to their chronic habit of discounting as their fight for share of wallet intensifies.  

Belk and 99 Cents Only are the only retailers whose capital structures Wyeth considers most unsustainable.  But she also suggests keeping a close eye on J. Jill.

Debt Ratings

Moody’s Investors Service released in December its 2022 Outlook for the US Retail & Apparel sectors.   Moody’s observed that businesses who survived the pandemic “have benefitted from a robust consumer, coupled with favorable capital markets that have paved the way for refinancings and lower borrowing costs, which has supported lower default risk”.  

The companies listed below are currently of greatest concern.

Other Companies Worth Watching

Unglesbee, in the article mentioned above, put some other companies on his Watch List that have not already been listed.  He used additional screening tools, over and above the three ones we have used.  His list includes Boardriders; Casper; Chicos; Farfetch; Neiman Marcus; Talbots; Tuesday Morning; and VINCE.

Tying This Back To Chapter 22

So much has changed in the world of Retail that it almost seems unfair to call it a Chapter 22 situation if a retailer made its first trip into Chapter 11 prior to 2016.  This is admittedly an arbitrary line in the sand, but it certainly feels right.

Of the many distressed companies already listed, which ones made a filing between 2016 and 2021?  The only two are Belk and Men’s Wearhouse.

The Bottom Line

Just as it isn’t easy for a Major League Baseball team to lose more than 70% of its games, for retailers operating in the year 2022 it takes a special set of circumstances to necessitate a trip into Chapter 11. That’s even more true if that trip is a return trip.