J. Crew's Debt Swap Plan Already Faces OppositionBy and
Swap offer for 2019 PIK notes would use brand as collateral
Retailer is asking lenders to drop brand-related litigation
A move by J. Crew Group Inc. to tame its $2 billion debt load is already meeting resistance from creditors who’ve been battling the preppy clothing chain over control of its brand.
Almost immediately after J. Crew launched an offer to exchange its 2019 notes and persuade its lenders to drop pending litigation, dissenters holding the company’s term loans started to gather signatures for an agreement to oppose their portion of the deal, according to people with knowledge of the matter.
The dissidents want to continue pressing their legal fight against J. Crew’s plan to move its intellectual property assets, such as the valuable brand name, to a subsidiary that’s out of reach of creditors, the people said. They’re being advised by law firm Jones Day and investment bank Houlihan Lokey.
J. Crew, struggling from almost three years’ worth of declining sales and a debt burden following its 2011 buyout by TPG and Leonard Green & Partners LP, asked bondholders Monday to extend the maturity of $566.6 million in notes and said it planned to settle the IP lawsuit filed by lenders. The debt-laden retailer started a private offer to exchange 2019 pay-in-kind notes for an equity stake and bonds that mature in 2021. J. Crew also made a second offer to term-loan lenders asking them to dismiss the pending litigation against the company in exchange for meaningful compensation.
Creditors who hold both the term loan and the company’s 2019 notes are supporting the deal, said the people, who asked not to be identified because the negotiations are private. Anchorage Capital Partners and Blackstone Group LP’s credit arm GSO Capital Partners, the two largest cross-holders with about 28 percent of the term loan between them, signed the company’s restructuring support agreement, according to company filings.
Anchorage and GSO have bought up parts of the loan in recent months to gain more control over a restructuring deal to protect their investments, Bloomberg previously reported. They’re trying to buy even more to gain the control of the 51 percent needed to push through the term loan amendment, said one of the people. At least 95 percent of bondholders must accept that proposal for it to proceed.
Representatives for Anchorage, Houlihan and GSO declined to comment, while representatives for J. Crew and Jones Day didn’t immediately provide comment.
S&P Global Ratings cut J. Crew’s corporate credit rating Wednesday, calling the exchange offer distressed because participating holders will receive significantly less than par value. S&P will further lower the rating to selective default when the exchange is complete. Moody’s Investors Service warned it might also downgrade the retailer, and said J. Crew’s capital structure will remain untenable even after the swap.
Reorg Research previously reported that term loan lenders had begun to sign a cooperation agreement.
J. Crew, which is advised by investment bank Lazard Ltd., sued the agent for its senior lenders in February to preempt a dispute about its plans to move its IP assets. A group of lenders pushed back the following month with a countersuit claiming the company was insolvent when it moved the assets and that the private equity sponsors’ actions “improperly advance the owners’ self interest.” The group also said there were no assets available to repay the PIK notes.
It’s unclear how the debt exchange will be affected if the lenders refuse to drop those claims against the company. The bond offer isn’t contingent on their approval, according to filings. But if the judge rules that the asset move was illegal after the swap is completed, J. Crew would be left in a difficult situation, with those assets pledged to multiple companies and creditors.
The retailer is struggling to adjust as shoppers flock to online commerce amid changing tastes. It announced last week that long-time Chief Executive Officer Mickey Drexler is leaving his post and James Brett, president of Williams-Sonoma Inc.’s home furnishings chain West Elm, is taking the helm in an effort to turn the company around.
— With assistance by Lindsey Rupp