The bloodletting in the retail sector is expected to create a wave of bankruptcies, debt restructurings and defaults in the next 12 months, and shareholders and bondholders should brace for more pain.

Rating agencies are forecasting a sharp spike in the retail default rate, while turnaround experts are warning that companies that fail to react to the changes in the business are unlikely to survive.

“There’s widespread panic across the board,” said Larry Perkins, chief executive of SierraConstellation Partners, a financial advisory and turnaround firm. “Whether that leads to bankruptcies or not, there will be a shakeout, and retailers are going to have to respond to the changes.”

Teen retailer Rue21 became the latest victim this week when it filed for bankruptcy with a prepackaged plan that would allow it to emerge as a smaller player with fewer stores and a cleaned-up balance sheet. It joins a long list of teen retailers that have gone out of business in the past few years, including Wet Seal, Aéropostale, Quiksilver, Pacific Sunwear and American Apparel.

“ ‘If you’re not shipping for free in two days, forget it.’ ” — Larry Perkins, SierraConstellation Partners

Fitch Ratings has 11 names on its list of loans and bonds of concern, which features those issuers with a significant risk of defaulting on their borrowings within the next 12 months. The loans list covers $5.6 billion in debt and is led by Sears Holdings Inc. US:SHLD with about $2.5 billion of at-risk debt, along with Gymboree, Nine West Holdings, 99 Cents Only Stores, True Religion Apparel, Charlotte Russe, Charming Charlie, NYDJ Apparel and Vince.

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Plus:Number of distressed U.S. retailers at highest level since Great Recession

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Meanwhile, the profit warnings from the sector continue to pile up, and stocks are taking a beating. Ann Taylor parent Ascena Retail Group Inc.’s stock US:ASNA cratered 27% on Thursday — the second-worst one-day selloff in its history — after the company warned that it will not meet earnings targets and no longer expects traffic to stabilize.

“The specialty retail sector is in a period of unprecedented secular change that is disruptive to traditional business models, and we believe operating conditions in our sector are likely to remain challenging for the next 12 to 24 months,” said Ascena Chief Executive David Jaffe.

The Amazon effect

The list of factors hurting the sector are well flagged and start with increased discounting in the face of competition from Amazon.com Inc. AMZN, -2.54% . The online giant has decimated bricks-and-mortar retailers with its e-commerce capabilities, forcing them to invest heavily to catch up.

“If you’re not shipping for free in two days, forget it,” said Perkins.

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Amazon working on at least three grocery-store formats

Retailers are also being hammered by weak mall traffic and changing consumer behavior that has spread beyond the fickle teen demographic. Pressure on discretionary spending is weighing against a background of rising rents, health care and food costs.

Debtwire analyst Phillip Emma said retail is now looking like the airline sector in 2011, when American Airlines AAL, -3.15% , Delta DAL, -2.50% , United UAL, -3.11% , US Airways and Continental filed for Chapter 11 protection one after the other. “They all went bankrupt at the same time, which allowed them to reduce capacity pretty dramatically,” he said. “It may be [that], at some point, retailers will have shut enough stores to become a sustainable business, and the negative numbers will plateau.”

Sears: The next shoe to drop?

Experts have their eyes on one of America’s most storied retailers as potentially the next shoe to drop. Sears, which has been struggling to turn around for several years, has kept itself afloat with loans from its hedge-fund-operator owner, Eddie Lampert, deep cost cuts and asset sales. The company said in March there is “substantial doubt” about its ability to survive.

Read:Three zombie retailers in danger of disappearing

“Eddie Lampert is the only one who doesn’t know the game is over,” said Perkins. “The fundamentals have slid so far down the hill [that], no matter what he says or does, it’s not going to help.”

The latest stress for Sears is vendors, at least one of which is refusing to supply it without cash in advance, as the Wall Street Journal has reported. “Vendors watch companies carefully as soon as they know there’s trouble, [and] they don’t want to take a loss if a company fails,” said Perkins. “And the market is saying Sears and Kmart have failed.”

Debtwire’s Emma agreed that Sears is the most troubled from an operational view, but it still has some room to maneuver.

“Sears has a deep-pocketed owner, and it’s getting relatively good rates — for a hedge-fund loan,” he said. “Bond prices are reasonably high, so there’s a disconnect between the bonds and the business. It’s not a certainty that they would have to file [for bankruptcy protection] in the next year; they could keep themselves afloat by monetizing more assets.”

Read:Sears’ restructuring plan lacks the one thing it needs most: a way to drive sales

Sears responded to a request for comment by saying it is “determined to remain a viable competitor in retail” and listed for MarketWatch all the actions it has taken in the past few months to raise money and reduce debt. These include the monetization of real-estate assets to the tune of $177.5 million, amendments to loan agreements, and the sale of the Craftsman hardware brand for more than $900 million.

But Mohannad El-Barachi, co-founder of SweetIQ, a marketing advisory firm, said Sears and other traditional retailers are failing because they have not reinvented themselves to ensure they connect with today’s consumer. That means making stores more attractive, putting in place a strong e-commerce strategy and establishing a presence on the social-media platforms that are heavily used by millennials.

“The Searses of the world have stores that have looked the same forever,” he said. “Retailers today have to innovate, or their customers will just go elsewhere.”

Death by debt

Some of the most at-risk retailers are those that were taken private in the big leveraged-buyout boom that took place right before the 2008 financial crisis, said Debtwire’s Emma. Companies including Neiman Marcus, Gymboree, Claires Stores and J. Crew are under additional pressure from the costs of servicing debt taken on by their private-equity owners.

See:Neiman Marcus is now borrowing money to make interest payments on its debt

“A lot of those deals haven't worked out, and the sponsors didn’t have an exit strategy in place, which has exacerbated the problem,” he said. “Those companies aren’t just being hurt by industry conditions.”

J. Crew, for example, was taken private by private-equity firms TPG Capital and Leonard Green in 2011 in a $3 billion deal that has left it saddled with more than $2 billion in debt. The company is currently trying to persuade creditors to participate in a bond exchange of $543 million in 7.75% and 8.5% notes that mature in 2019.

J. Crew wants to place the intellectual property of its brand into a new company, and then offer bondholders new notes issued by that company with a 9% coupon and maturity date of 2021, along with equity. But some creditors are arguing that the IP is collateral on other borrowings and removing it would constitute a default. J. Crew has filed a suit in New York State Supreme Court to push through the exchange.

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And: J. Crew to cut 250 jobs as part of reorganization

Justin Smith, managing director at Xtract Research, a firm that analyzes debt covenants, said the terms of J. Crew’s bonds are loose enough to allow the company to keep assets out of the grasp of creditors. “That’s one reason it doesn’t feel right to bondholders, who may not have appreciated what those loose covenants would mean in a distressed situation,” he said.

The J. Crew notes were trading at 49 cents on the dollar Thursday, according to MarketAxess. Moody’s Investors Service has said the company’s capital structure is unsustainable and the exchange will leave it with excessively high leverage and uncertainty about its ability to stabilize earnings.

Still, retailers have some tools available to keep them out of court, said Emma. They can generate cash from their inventory, obtain financing and try to stay afloat for long enough to figure out the best way forward. Mergers are another possible way to achieve growth.

“That’s why Hudson Bay CA:HBC is looking at buying Neiman Marcus, which more than others is a victim of changing shopping habits,” he said. “But they have good real estate and some key markets and other assets people find attractive.”