J. Crew may have found a clever way to mend several tears in its corporate fabric. The flailing clothier owned by TPG Capital and Leonard Green & Partners is trying to restructure some $567 million of notes by offering holders a deal that runs the risk of irking another set of creditors. So J. Crew has stitched something up for them, too. If it manages to thread the needle, J. Crew may provide a blueprint for other wobbly retailers contemplating bankruptcy.
The first problem J. Crew is trying to solve is eliminating notes that come due in 2019. These I.O.U.s have a paid-in-kind structure, and interest has been building since the company issued the notes in 2013. The new deal offers noteholders, including Blackstone's debt outfit GSO, new bonds, preferred stock and equity in a reorganized J. Crew. Since the deal was announced on Monday, the securities have increased in price, suggesting owners like the plan.
Importantly, though, this exchange means the new notes will be backed by intellectual property, notably J. Crew's trademark and legally registered name, valued at some $250 million. TPG had transferred these from J. Crew into a subsidiary late last year. Lenders higher up the capital structure did not like that asset transfer and filed a lawsuit to block it. To get them on board, J. Crew has offered to buy $150 million of their debt at par so long as they drop litigation on the matter.
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These loan holders, including Highland Capital, may rightly feel a bit squeezed. But their loans are trading at a 30 percent discount, according to Thomson Reuters data, and some analysts agree that the credit agreements gave TPG the right to transfer these assets. This deal, then, could offer more certainty than messy litigation.
J. Crew is not alone in swapping around valuable trademarks and other intangible assets. More than 20 of the 25 retailers Moody's Investors Service rates B3 negative and below have credit agreements that permit asset transfers to unrestricted subsidiaries. One of them, Neiman Marcus, moved its MyTheresa brand into a subsidiary. On Tuesday, the department store chain abandoned efforts to sell itself.
Given the vagaries of the American retail business, there will be more restructurings like J. Crew's. Rivals who once mimicked the fashionable items on its racks will soon be copying its debt restructuring.
Commentary by Lauren Silva Laughlin, columnist at Breakingviews.
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