by Kirk O’Neil

Middle-market retailers will file fewer bankruptcies this year than in 2009, but the industry’s struggles are by no means over.

“The wave of bankruptcies that hit in the first six months [of last year] was the most I’ve seen in my 27 years in the restructuring business,” said Ken Simon, managing director and retail specialist at bankruptcy and restructuring advisory firm Loughlin Meghji + Co. in New York. “We will not see as many retail bankruptcies this year as in 2009. However, there will still be substantial retail bankruptcies.”

Middle market retailers will continue to seek bankruptcies and restructurings as the liquidity crisis, unemployment, and other pressures on consumers leave companies with no other choices. Lenders remain unwilling to provide capital to middle market businesses, as consumer credit is reduced and unemployment is likely to remain high through the end of the year. Indeed, the lack of liquidity is a particular problem for middle market retailers, putting them at a competitive disadvantage. Major publicly traded retailers, even those that are in financial trouble, often have access to lender lines of credit, Simon said.

“I suspect in the middle market that we’ll see a lot of bankruptcies because the middle market doesn’t have access to the credit markets,” said Bill Kosturos, managing director and co-head of Alvarez & Marsal’s commercial restructuring practice on the West Coast. “The credit markets aren’t helping anyone out. They’re not helping business and they’re not helping consumers. In the next three months, you’ll start seeing companies fall.” But major publicly traded companies, big department stores and big-box retailers will not have as much trouble with financing, Kosturos said.

“The big boys will be okay,” he said. “They can still tap the credit markets, and they have a lot of options.”

Exacerbating the liquidity problem is the difficulty many retailers will have reducing real estate and other expenses, Kosturos said.

“Most landlords are not willing to cut deals on leases,” he said. “Landlords are strapped right now and have a lot of dark space.

“More companies are going to have negative comparables. They can’t cut costs far enough. They’ve already cut labor hours, and there isn’t anywhere else to cut. Unless revenue improves, you could see a fair amount of bankruptcies.” Karen Ghaffari, managing director of Fitch Ratings’ retail group, expects another dismal year for retail with unemployment having a significant impact on consumer spending. Fitch forecasts that retail sales in 2010 will be about the same as last year. The firm forecasts that unemployment will average 10.2% for the whole year, after peaking at 10.4% in the second quarter and improving to 10% by the fourth quarter.

“We’re still going to have foreclosures and personal wealth is not improving,” Ghaffari said. “We’ll still have pressure on consumers and consumers’ ability to spend. Until we see real data on improvement of wages and jobs, there’s still going to be pressure on consumers.” Those pressures are likely to include the continuing high rate of home foreclosures, the lack of consumer credit, and stagnant personal wealth.

“Some of the big problems include the ongoing household deleveraging, the high levels of consumer debt and the rise in the savings rate,” Ghaffari said. “Not much cash is coming in the door and retailers have a tremendous debt burden.”