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Retailers may dominate bankruptcy headlines in 2017

Major retail bankruptcies jumped in 2016 and changing demographics may mean more are in store in 2017.

By Ian Wenik

Energy companies grabbed the biggest bankruptcy headlines in 2016 as U.S. bankruptcy filings in the sector rose 56% year-over-year (228 in 2016 from 146 in 2015), according to data collected by The Deal. Much of that rise can be traced to the secular pressure of continually low crude oil prices, which battered oil and gas producers and their ancillary service providers alike.

As the calendar flips to 2017, though, retailers may take center stage in bankruptcy courts.

The number of bankruptcy filings by U.S. retailers with at least $250 million in liabilities nearly doubled in 2016 (7 from 4).

Of the seven big retail filings in 2016, three chains suffered through large-scale closures (golf retailer Golfsmith International Holdings Inc., mall-based clothing retailer Aeropostale Inc. and casual dining chain Roadhouse Holdings Inc.). A fourth, clothing retailer Pacific Sunwear of California Inc., closed hundreds of stores in the months before its bankruptcy, but only shuttered 10 while in Chapter 11.

A fifth, Sports Authority Holdings Inc., liquidated everything and a sixth, American Apparel LLC, will likely suffer the same fate after it failed to find a buyer for its retail business at auction.

Only supermarket chain Fairway Group Holdings Corp. escaped with almost no damage in its bankruptcy, closing one store in a prepackaged filing. Weil, Gotshal & Manges LLP (ninth in The Deal’s year-end bankruptcy league tables by total cases filed) has had a hand in three of those seven cases. It represented Golfsmith, Aeropostale and Fairway.

An oversupply of retail space in the U.S. and changing demographics could lead to some major retail filings in 2017.

“I think Sears Holdings Corp. is the big one,” said Thomas S. Onder of Stark & Stark PC, who represents landlords in retail bankruptcies like Golfsmith’s. The once-iconic department store seems to have little reason for existence when its functions are performed more reliably by online retailers like Amazon. “Sears is probably going to file sometime this year or early next year… they’re really a real estate holding company rather than just a retailer.”

The market for clothing retailers seems particularly soft, as teenagers are concentrating their discretionary spending on experiences instead of fashion labels.

Women’s apparel retailer Limited Stores LLC kicked off what may be a busy year in debt restructuring for clothing retailers in 2017 when it filed for Chapter 11 on Jan. 17, one week after it closed all 250 of its stores. Wet Seal Inc., which already went through Chapter 11 in 2015, is teetering on the brink of a second insolvency filing and said Thursday that it would shutter its 171 locations as well.

Other mall-based retailers like Claire’s Stores Inc., J. Crew, Nine West Group Inc. and True Religion Apparel Inc. are trying to cut their massive debt loads.

“The retail market for teen and children’s clothing is the big one to watch out for,” Onder said. “The millennials are out of that generation now and in their 20s. It’s the largest generation since the baby boomers.”

Aeropostale’s inventive survival strategy may be a blueprint for some struggling retailers. At least 229 of its 810 stores were saved at auction from full-chain liquidation by a consortium that included two REITS that operate malls: General Growth Properties Inc. and Simon Property Group Inc.

“I’ve got a couple partners in my office who have been around for 30 years practicing bankruptcy law and they’ve said that the recent bankruptcies that we’ve seen are a heck of a lot more orderly ones from 10, 15 years ago,” Onder said. “You actually have folks like Simon coming on in and trying to make sure there’s a graceful exit so they can plan how they’re going to wind up using the [retail] space. That still doesn’t mean everybody’s going to be holding hands, but we do think that’s a model that’s going to occur as we see what’s ahead.”

Here is the complete breakdown of the law firm, lawyer, investment bank and investment banker rankings from The Deal for 2016: