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J. Crew Term Debt Swap Meets Resistance From Creditors

The company's decision to tame its $2 billion debt load is already meeting opposition from a group of creditors that’s been battling the preppy clothing chain over control of its brand.
J.Crew Autumn/Winter 2015 | Source: J.Crew
By
  • Bloomberg

NEW YORK, United States — A move by J. Crew Group Inc. to tame its $2 billion debt load is already meeting resistance from a group of creditors that's been battling the preppy clothing chain over control of its brand.

Almost immediately after J. Crew launched an offer to exchange its 2019 pay-in-kind notes and to persuade its lenders to drop pending litigation, the group has started to gather signatures for a cooperation agreement to oppose the term loan deal, according to people with knowledge of the matter.

The dissenters, advised by law firm Jones Day and investment bank Houlihan Lokey, were already involved in a legal fight over the retailer’s plan to move its intellectual property assets, such as the valuable brand name, to an unrestricted subsidiary out of reach of the creditors.

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.

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Anchorage, Blackstone

Creditors who hold both the term loan and the company’s 2019 pay-in-kind 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 necessary 51 percent control 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.

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. Reorg Research previously reported that term loan lenders had begun to sign a cooperation agreement.

New CEO

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 over the interests of J. Crew Company and its creditors.” The group also said there were no assets available to repay the PIK notes.

If the lenders refuse to drop those claims against the company, it’s unclear how it would impact the debt exchange. The bond offer isn’t contingent on the term loan lenders’ approval, according to filings. But if the judge is to rule 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 of its companies and creditors.

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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.

By Emma Orr and Jodi Xu Klein, with assistance from Lindsey Rupp; editors: Nikolaj Gammeltoft, James Crombie and Rick Green.

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