UPDATE: June 8, 2020: In commenting on a report that the retailer was exploring bankruptcy, an Ascena Retail Group spokesperson said in an email to Retail Dive: "Like all companies today, ascena is operating in an unprecedented and highly dynamic environment and the Company continues to take steps to reduce expenses and optimize its liquidity position. We are evaluating all options available to preserve our ongoing operations and we will reassess our position on all of these decisions on an ongoing basis."

UPDATE: June 8, 2020: Ascena Retail Group is discussing a possible bankruptcy with lenders, according to a Bloomberg report. The retailer is consider selling three of its banners, including Catherines, while it would keep Ann Taylor and Loft in a bankruptcy that could come as early as July, according to Bloomberg. Lenders are also discussing taking over the company as part of a Chapter 11 deal.

An Ascena spokesperson did not immediately reply to Retail Dive's request for comment.

Dive Brief:

• Ascena Retail Group has brought on new advisers to "explore balance sheet alternatives," according to a Debtwire report that cited unnamed sources.
• Among those advising the apparel retailer is law firm Kirkland & Ellis, which has worked on many high-profile retail bankruptcies over the years.
• Also working with Ascena is Guggenheim Securities, which advised the retailer last year on the sale of a majority stake in the Maurices banner, and the consultancy Alvarez & Marsal. An Ascena spokesperson did not reply to Retail Dive's request for comment. 

Dive Insight:

For retail suppliers and lenders, the name Kirkland & Ellis can bring on anxiety, given the law firm's long roster of retail clients that it has represented in Chapter 11. 

Early this year, as just one example, news that Stage Stores had brought on Kirkland as an adviser sent off a panic in its supply chain and made it difficult for suppliers to finance shipments to the retailer. (Stage filed for Chapter 11 in May, as the pandemic forced the retailer's stores to shut and derailed efforts to raise new capital.)

Of the retailers to go bankrupt this year alone, Kirkland's client list includes some of the most prominent names, including Neiman Marcus, J.C. Penney, Stage Stores and Pier 1.

As for Ascena, company executives have said explicitly, on multiple occasions, that bankruptcy is not on the table. Most recently, in mid-March, the company indicated that "[b]ankruptcy is not being considered," after it bought back some of its on debt on the cheap to give its balance sheet some relief. 

The fact that Ascena's debt was priced below its face value was a market signal that investors expect a default at some point, which could include various forms of out-of-court restructurings along with bankruptcy. 

In downgrading Ascena over the repurchase, S&P Global analysts Mathew Christy and Helena Song said at the time, "Our opinion considers the company's unsustainable capital structure, its still significant debt burden following the repurchases, and our expectation for weak performance amid a highly challenging operating environment." They added that the coronavirus outbreak "will further pressure store traffic and limit conventional refinancing prospects," while Ascena was already struggling to turnaround a weak operating performance. 

Although some of Ascena's banners have recently performed well — including Ann Taylor, Lane Bryant and its plus fashion business — the company's sales overall have dragged. The company's top-line fell 4.3% in the fourth quarter as its operating loss widened by 120%.

The COVID-19 crisis has exacerbated Ascena's troubles. The retailer in March temporarily closed all of its stores (by late May it had reopened about 450 of 2,800) and furloughed employees. It also drew everything available from its credit facility — $230 million in all — as it sought financial flexibility during the closures. 

The company's leverage was already a problem, as it took on debt to finance an acquisition spree, just before traffic and sales in mall-based retail began a long-term decline. (The purchase of the Ann Taylor brands led to a major asset write-down and has since sparked an investor lawsuit.)

As the company has looked to stabilize its bottom line and refocus its business, Ascena finished its out-of-court wind down of its Dressbarn banner and completed the sale of a majority stake in Maurices. But the retailer's future may depend on getting debt relief in some form.