J. Crew is looking to rejigger its debt load, but investors are wary.


J. Crew Group’s lenders are gathering their strength, preparing to hire advisers to apply pressure if the retailer’s efforts to restructure its more than $2 billion in debt don’t appear to be going their way.

It’s still unclear just how the debt rejiggering might play out. The retailer has considered putting the J. Crew name into a separate entity while tweaking the terms of its debt, which include $566 million in bonds coming due in May 2019 and a $1.5 billion term loan due in 2121.

Debt watchdog Moody’s Investors Service this month downgraded the rating on debt tied to the retailer and said J. Crew had a “very high leverage and an unsustainable capital structure.

Citi debt analyst Jenna Giannelli said the company’s sponsors — Leonard Green and TPG Capital, which bought the retailer for $3 billion in 2011 — still have some equity in the company and are looking to preserve it.

She said J. Crew can put about $277 million worth of assets into a separate subsidiary. While the market thought the Madewell business could be split off, the process now appears to revolve around separating the J. Crew name from the operating company.

“People are annoyed,” Giannelli said, acknowledging that debt holders are starting to take on a “we’re going to fight this” attitude and that “some level of organization” was forming.

But she said the company’s rights are clearly laid out in the debt agreements.

There are more than a few moving parts at J. Crew, which has been working to turn itself around.

Millard “Mickey” Drexler is said to be looking for a successor to work with him and learn the business. Sources have said that the search is separate from the debt restructuring, but certainly investors being asked to make a deal want a clearer view into the company’s future.

“Nobody wants to do some sort of exchange and then have some news come out that lowers the whole structure,” Giannelli said. “They want everything on the table. The business has gone awry, but I don’t know a ton of investors who are like, ‘Yeah, I want Mickey out.’ I think they might be nervous if he was out. He himself is kind of like the brand.”

But patience may be running low.

One debt expert, who requested anonymity, noted, “The whole reason for having a good brand name is you have to rely on the quality and the fit and all the other things. A year ago, I would have thought it would be a bad thing if [Drexler] left, but I’m not so sure anymore.”

The two groups of debt holders are both “getting formed” the source said, noting that the bondholders were considering hiring PJT to represent their interests, while the people holding the term loan were said to be looking at Jones Day.

PJT declined to comment and Jones Day did not reply to a query. A J. Crew spokeswoman could not be reached Tuesday afternoon.

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