Youth-market clothing retailer Rue21 has been struggling with almost $800 million in debt, and that burden may well drag the company into bankruptcy.
Warrendale, Pa.-based Rue21 styles itself the largest fast-fashion retailer in the U.S. The company operates 1,100 stores in malls and outlets. Its house brands include ruebeaute!, Carbon Elements, rue+ plus and rueGuy.
The company joins a variety of other distressed or bankrupt brick-and-mortar clothing retailers including J.Crew Group Inc., Payless, Kate Spade (KATE) , Forever 21 and American Apparel.
The company currently has a forbearance agreement to lenders, and unnamed sources cited by Bloomberg said the company could file for bankruptcy protection as soon as this month.
The forbearance agreement came into play after the company disclosed its inability to make a payment on a term loan according to Debtwire.
Data from FactSet indicate the company's debt consists of a $538.5 million secured first lien term loan B due in 2020 and $250 million in 9% senior notes due in 2021.
The company has liquidity in the form of an undrawn $150 million revolver.
In December Moody's Investors Service downgraded most of Rue21's debt from B3 to Caa1.
"The downgrade to Caa1 reflects Rue21's weak operating performance and credit metrics stemming from both a very challenging apparel retail environment, characterized by soft customer traffic and high promotional activity, and execution issues around inventory and merchandise management," Moody's said in a Dec. 12 ratings action.
Moody's noted that a slight increase in October quarter revenues did not do much for the bottom line.
Adjusted Ebitda fell 56% due to increased markdown activity to clear excess inventory and higher operating expenses. With unadjusted debt/Ebitda increasing to around 12x, Ebitda-Net Capex/interest well below one time and negative free cash flow, the company's capital structure is unsustainable at this level of performance.
As a consequence, Moody's maintains, Rue21 faces increasing probability of default including the potential for a distressed exchange over the next 12-18 months unless it can pull off a turnaround and increase cash flow.
The company has hired Rothschild as a financial advisor and Kirkland & Ellis as legal counsel, according to Debtwire, which says a group of first lien lenders has lined up Jones Day as counsel and PJT Partners as financial adviser. A group of loan cross-holders and unsecured bonds has purportedly hired Milbank, Tweed, Hadley & McCloy.