Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

It's been nearly 10 years since the Great Recession zapped consumers' jobs, 401(k)s and spending, sending retailers into a tailspin and megastores like Circuit City and Linens 'n Things out of business. For retailers, the mantra became "only the strong will survive."

But here we are, a decade later, and another wave of retailers from The Sports Authority to Payless Inc. is calling it quits. The number of retailers filing for Chapter 11 bankruptcy is approaching its highest level since 2008 and 2009.

Another One Bites The Dust
There have been more retail bankruptcies so far this year than all of 2016
Source: TheDeal, AlixPartners
Note: Includes resolved retail bankruptcy filings from January 1, 2006, to April 11, 2017, that had more than $50 million in liabilities. Restaurants and grocers are excluded.

Why now? Many point to the rise of Amazon and e-commerce, the glut of malls and a spending shift from clothes to health care and experiences. All of these trends hold true, but they've been building for a while now.

There's another ailment to consider: Some retailers survived the Great Recession only because investors were throwing easy money at them, perhaps unwisely. These retailers incurred sharply higher debt in the years after the financial crisis, a type of financial life support now expediting their demise.

Data show private equity firms targeted certain retailers with low debt loads and then had those companies borrow billions of dollars they now can't repay. Some of that money went to pay dividends to private equity investors.   

Consider Claire's Stores, which sells costume jewelry to tweens. It had virtually no debt in 2007 when Apollo Management bought it for about $3.1 billion. Today it's teetering on the brink of bankruptcy, struggling to keep up with nearly $2.5 billion of debt.

Rue21 Inc. had little debt outstanding when Apax Partners LLC acquired it in 2013. Now it can't manage its almost $1 billion of obligations and could go bankrupt as soon as this month. Or how about J Crew, which is so afraid of defaulting on more than $1 billion in debt it took on during a 2011 leveraged buyout that it's transferred its intellectual property into a new subsidiary protected from creditors. 

These retailers and their private equity sponsors took advantage of record-low borrowing costs after the 2008 financial crisis, which spurred central bankers to lower benchmark rates to zero and buy billions of dollars of government bonds. Such cheap money served as a "dinner bell" for sponsors to feast on target companies, leaving some retailers in a bad spot, according to a Moody's Investors Service report earlier this year.

Since then, U.S. retailers more than doubled their collective debt.

Doubling Down
U.S. retailers are struggling under the weight of debt they've been incurring
Source: The BofA Merrill Lynch US Issuers US High Yield Retail Index

So it's not just a coincidence the toll of bankrupt retailers is growing so quickly now. It's because the bill is coming due. Nineteen distressed retailers have to repay about $5 billion within the next five years, Moody's data show. Not all of these companies will survive.

Maturity Wall
Distressed retailers are facing some big debt maturities in the near term
Source: Moody's Investors Service

It's not just private equity-backed retailers that have benefited from easy money. Once-hot e-commerce upstarts including Nasty Gal, Gilt Groupe and Bonobos have benefited from nearly $50 billion in venture capital and other funding since 2012, according to CB Insights. 

But last year, funding began to fall off a cliff. Many startups struggled to raise more money. Some, like Nasty Girl, went bankrupt. Others, including onetime unicorn One Kings Lane, sold to strategic buyers for a fraction of their valuations. Walmart is scooping up a half-dozen retail startups that have been struggling or unable to raise more money. 

Deal Drop
E-commerce funding fell by 44 percent last year from the year before, as deal count dropped to a four-year low
Source: CB Insights
Note: 2017 reflects deals through 4/19/2017

And it's not just the retail industry that took advantage of an era of low borrowing costs. Telecom, media, oil -- the list goes on. 

But when analysts talk about the pain spreading throughout retailers, it's important to consider some of it has been self-inflicted. Many of these retailers were debt free not so long ago. Without all the leverage, perhaps they would have used the money they spent on interest payments to improve their businesses. Or perhaps they would have just died more rapidly, but it would have been less painful than the drawn-out decline these retailers and their investors are enduring.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net