Rue21 Inc, the teen clothing retailer that is based in Cranberry, Pennsylvania, has filed for bankruptcy. The bankruptcy filing contains agreements with lenders to lower the debt as well as offer capital that will support the restructuring process.
“The restructuring is an important step forward in rue21’s ongoing business transformation into a more focused and highly performing retailer,” rue21 said in a statement.
In the restructuring process, Berkeley Research Group will serve as the restructuring advisor of rue21 while the financial advisor and investment banker will be Rothschild. Kirkland & Ellis will be the legal advisor of the teen clothing retailer.
In April, the teen clothing retailer had in an online posting revealed that it would be shuttering around 400 stores in 48 states. At the time the retailer had over 1,100 stores. However, with the bankruptcy filing, it now looks likely that the retailer will shut down more stores as it reorganizes its portfolio of real estate leases.
The bankruptcy filing by rue21 comes as the brick-and-mortar retail sector is undergoing challenges as consumer tastes evolve and more shopping is done online. According to Fitch Ratings, shifts in the spending habits of teenagers and competition emanating from fast fashion resulted in rue21 filing for bankruptcy. With rue21 now filing for bankruptcy, the loan default rate in the retail sector in the United States will now rise to 1.7% up from 0.9%. There is also a likelihood of the default rate rising to 2.7% according to Fitch.
Last month reports emerged that the teen clothing retailer was missing payments and this was attributed to overleveraging. Since a buyout in 2013 by Apax Partners, rue21 has been highly leveraged and now has a debt of close to $1 billion that it is struggling to pay.
Cooperating with lenders
According to statement that rue21 issued, the Cranberry, Pennsylvania-based retailer will get out of bankruptcy sometime in fall and it will be bearing less debt by then. A restructuring plan which needs the approval of the court will see various lenders providing around $175 million. This will ensure that operations of the company do not cease and that employees and vendors are paid and programs like gift cards are honored.
Other retailers that have filed for bankruptcy as shopping habits change include Payless ShoeSource, a discount shoe retailer. Alongside the bankruptcy filing, Payless also announced in April that it would be shuttering about 400 stores across the globe. The number of stores that it had then was 4,000.