Where the COVID-19 pandemic flooded in and quickly swept away the vulnerable retailers — from J.C. Penney and J. Crew to Brooks Brothers and Neiman Marcus — the sector has been standing up higher to the pressures within the economy today.

But a bout of inflation not seen in a generation, an enormous run-up in rates of interest and continuing worries over recession are going to prove to be an excessive amount of for some. 

Already, David’s Bridal succumbed to bankruptcy and, outside of fashion, Bed, Bath & Beyond is liquidating. 

Retail is on edge and with good reason. 

To get a way of what comes next, WWD spoke to Richard Klein, senior managing director of Hilco Corporate Finance, experts in restructuring. This conversation has been edited for length and clarity.

WWD: How busy are you going to be given the economy?

Richard Klein: We’re within the early stages of a distress cycle where we’ll see default rates tick up. But default rates are a funny thing because there’s so far more debt on the market today than ever before that you just don’t need to get to the extent we’ve seen in other major downturns. There’s so far more dead capital on the market that even a 1 percent movement in default rates goes to maintain people pretty busy.

WWD: Is there somewhere within the capital structure where corporations are most vulnerable today? 

R.K.: Capital structures are so far more complex than they were. Twenty years ago, it was rare to have a second lien. I’ve seen one-and-a-half lien debt, second lien, third lien debt. There’s not much room for error in these capital structures as of late.

WWD: You said we were initially of the distress cycle. Does that mean more bankruptcies?

R.K.: I feel so, yes. Either you’ve gotten floating rate debt, debt which goes up, or you’ve gotten fixed rate debt, mostly bonds. Hopefully you refinanced greater than a 12 months ago before rates of interest began to tick up. In case you didn’t, capital’s going to be costlier.

WWD: Is there a profile of an organization that’s feeling probably the most pressure now?

R.K.: Any company that’s bumping up against covenants or availability on their liquidity line are corporations that you just’re going to see have problems. What really is driving restructuring as of late is maturity and/or liquidity needs.

WWD: So we have now rates of interest, inflation, worries a couple of recession after which, on top of that, we have now a number of corporations with a number of debt and a rapidly changing market. All of that results in increased stress, more bankruptcies and restructuring. What happens when people get to you? 

R.K.: You hope they arrive to you early enough that you just’ve got time to assist them implement operational changes or changes to their store footprint, have the option to rationalize their footprint, do away with underperforming locations in order that the worth proposition is there for them to restructure and survive.

WWD: It sounds easy, but a number of retailers are optimistic. They’re builders, they’re growers. 

R.K.: In my experience, whether it’s a retailer or a restaurant chain, there’s all the time a reason why that store is underperforming and it’s going to show around. Generally corporations keep too many marginal stores after they should cut them. Because even when it’s just breakeven, there’s still a number of capital being tied up in the shape of inventory that may very well be deployed elsewhere.

WWD: Where is the worth in retail corporations today?

R.K.: You’ve got to have a look at the shop footprint. You’ve got to have a look at the money flows the business generates. That’s actually considered one of the the explanation why so many liquidate, is due to value of the inventory. But often some of the neglected pieces of value is the brand itself. We’ve seen brands get sold for much higher valuations than we might’ve expected.