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Risk Insight Monthly Video & Blog Series: Sports Authority – The Latest and Greatest Disrupted Retailer

Sports Authority filed for Chapter 11 protection on March 2nd in the face of growing online competition, initiating a rush to close weaker stores and find a buyer before the end of next month. This is not shocking. The fate of the retailor became very clear on January 15th, when the company missed a bond interest payment, triggering Standard & Poor’s Rating Services to assign a “D” rating, signifying a default from its previous rating of “B-“.

The company has agreed to take up to $595 million in bankruptcy financing from senior lenders in debtor-in-possession financing during its restructuring. Court documents note that the loan was needed to reassure vendors, some of whom had begun to withdraw their support after the missed interest payment.

It is Not Just Sports Authority – The Entire Retail Industry is Feeling the Pain 

US retailers are four times more likely to file for Chapter 11 in 2016.
 Sports Authority is just the latest retail giant to fall on hard times. Traditional retailers are struggling with a shift to online shopping and fewer customer trips to shopping malls. In 2008, Circuit City went bankrupt, followed by Borders in 2011. Both ultimately closed. In 2015, RadioShack filed for bankruptcy, and American Apparel filed in October, although both companies are still in business, but with a smaller number of stores. Even chains such as Macy’s Inc. and WalMart Stores Inc. are closing some stores this year.

This increasing downward trend across the entire North American Retail Industry was something that became even more evident at the end of last year, when the median Probability of Default or PD was demonstrably high at 1.23%.

When there is acceleration in credit quality deterioration, consider using both fundamental and market-based PD models.
 In fact, S&P Global Market Intelligence’s December Issue of Credit Market Pulse, a bi-monthly publication on credit risk trends, indicated that, overall, US retailers would be four times more likely to file for Chapter 11 in 2016 than companies from other industries. 

What are the lessons learned? 

There are two. First, when there is acceleration in credit quality deterioration, consider using both fundamental and market-based PD models. The fundamental model will capture the weakening financials or fundamentals, while the more sensitive market-based model will reflect the heightened volatility in equity prices. This combination is key to measuring a company like Sports Authority’s credit risk.

Secondly, for traditional brick and mortar retail stores, the disruption caused by internet retailers will only intensify. So in short, those retailers will need to adapt or join the graveyard of companies that did not.

Watch Bob Durante’s video to further explore the increasing credit risk in the Retail Industry.

Sports Authority – The Latest and Greatest Disrupted Retailer

Thank you for checking out the March 2016 installment of the Risk Insight Monthly Video & Blog Series! Check back here each month to read the latest Risk Insight blog and video. Contact us if you are interested in learning more about this important topic

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