2021 Turning Points: Bankruptcy Explosivity in Retail, Oil Boiling Under

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Energy and retail companies made headlines in 2020, as economic shutdowns due to the COVID-19 pandemic hammered each sector. There was a distinct shift in the first half of 2021, as re-openings and consumer demand surges have produced increased revenue and retailers continuing to build out omnichannel and fulfillment capabilities. 

No one, whether credit manager or financial analyst, sees a rebound for brick-and-mortar retail just because shopping malls are slowly opening back up. Many oil & gas companies have benefited from rising oil prices, but have tightened capital spending, implemented workforce reductions, and asset sales. In a general macroeconomic sense, 2021 performance represents better, but not great. Despite improved industry conditions, there are high-risk companies that pose elevated bankruptcy risk. Here's a review of some of the most worrisome names in these two high-profile sectors.

CreditRiskMonitor is a B2B financial risk analysis platform designed for credit, supply chain, and other risk managers. Our service empowers clients with industry-leading, proprietary bankruptcy models including our 96%-accurate FRISK® score for public companies and 70%-accurate PAYCE® score for private companies, and the underlying data required for efficient, effective financial risk decision-making. Public company coverage comprises more than 57,000 businesses worldwide, totaling $69.3 trillion in corporate revenue compared to global GDP of $85.9 trillion. Additionally, private company coverage includes information on millions of businesses the world over. Thousands of corporations around the world – including more than 35% of the Fortune 1000 – rely on our expertise to help them stay ahead of financial risk quickly, accurately, and cost-effectively.

Low Energy

CreditRiskMonitor's FRISK® Stress Index shows the collective probability of failure in industries, countries, or customizable portfolios over the coming 12 months. Plenty of industries saw bankruptcy risk increase in 2020 and the broader Energy space was particularly hard hit with 15 public companies in the North American oil production and oil services sectors filing for bankruptcy. This list of Chapter 11 filings included high-profile names like Chesapeake Energy Corporation and California Resources Corporation. The bankruptcies continued into 2021, with major operators like HighPoint Resources Corporation, Seadrill Limited, and Gulfport Energy Corporation all collapsing as well. 

Oil and Gas Extraction Industry
 

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A rising FRISK® Stress Index trend line indicates increasing risk, while a falling trend highlights declining risk.
A rising FRISK® Stress Index trend line indicates increasing risk, while a falling trend highlights declining risk.

The oil and gas extraction/upstream industry's FRISK® Stress Index is still 69% higher than it was at the start of the Great Recession. Using the same timeline, oil and gas field services, a subsector of the broader category, has a FRISK® Stress Index that's even higher at a 105% risk increase.

Company Name Country FRISK® Score
Basic Energy Services, Inc. U.S.A. 1
Nine Energy Service, Inc. U.S.A. 1
PGS ASA Norway 1

Each of these public companies was recently highlighted in a CreditRiskMonitor High-Risk Report. Click the links to view these free reports outlining the specific risks at each company.

There are currently 13 companies in the broader group that have FRISK® scores of "1," indicating bankruptcy risk that is 10-to-50x that of the average public company. Seven of those companies reside in the oil and gas field services subsector. Overall, the energy sector remains a high-risk industry with headwinds tied to regulation and demand.

Ravaged Retail

The broader retail industry had been dealing with the fallout from the retail apocalypse for years leading up to the pandemic, which accelerated store closures, lease negotiations, and bankruptcies into 2020. There were 14 North American retail bankruptcies in 2020, including department store icons J. C. Penney Company, Inc. and Neiman Marcus Group LTD LCC. Bankruptcy filings didn't stop at the end of the year, with Christopher & Banks Corporation seeking court protection in January 2021.

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Bankruptcy risk in the apparel and accessories store sector is still near the highest levels seen during the last recession.
Bankruptcy risk in the apparel and accessories store sector is still near the highest levels seen during the last recession.

Aggregate bankruptcy risk has fallen dramatically in 2021, but the FRISK® Stress Index for general merchandise stores is currently 47% above where it was at the start of 2008 while the harder-hit apparel and accessory store group is still 113% higher. Although there are only three FRISK® "1" companies across the two industries, 41% of general merchandise stores and 37% of apparel and accessory stores fall into the high-risk FRISK® score "red zone," which represents the bottom half of the "1" (highest risk)-to-"10" (lowest risk) scale. A reminder that, historically, 96% of all public company bankruptcies have been captured with the early warning detection provided by the FRISK® score and the red zone. 50% are captured in the FRISK® “1” category.

Company Name Country FRISK® Score
Future Retail Limited India 1
Adler Modemaerkte AG Germany 1
Sequential Brands Group, Inc. U.S.A. 1

Although this trio of retail names presents the most bankruptcy risk to counterparties, many others trend in the high-risk FRISK® Score red zone.

Economic re-openings and pent-up demand have been a boon to many retailers, yet the damage from the forced government closures is still lingering. Companies with heavy debt loads and weak operating results are at particularly acute risk. For example, Future Retail Limited has reported four consecutive periods of net losses, and due to an excessive debt burden, management pursued a distressed debt exchange. However, the company recently requested an extension to file its latest half-year results due to inquiries raised by its auditors. German-based textile retailer, Adler Modemaerkte AG, also requested a postponement on its financial statements due to its insolvency reorganization plan, which is anticipated to conclude as early as August 2021. Consumer brand operator, Sequential Brands Group, Inc., recently received a waiver under its credit agreement to avoid defaulting while dropping to a FRISK® “1” thanks to the score’s proprietary subscriber crowdsourcing component. These high-risk companies only represent a small fraction of retail operators in the FRISK® Stress Index that continue to struggle.

Bottom Line

The Energy and Retail sectors were ravaged in 2020. The first half of 2021 has brought notable improvement in overall risk, but these two sectors are still flashing warning signs. Contact CreditRiskMonitor today to see how you can proactively protect against such risks and the many more CreditRiskMonitor tracks within our coverage of more than 57,000 public companies worldwide.