J.Crew RTW Spring 2017


J. Crew Group Inc.’s dealings with debt holders are becoming a “hostage” situation.

That’s at least according to the lawsuit the retailer filed late Wednesday, asking a New York State Supreme Court judge for an official seal of approval to initiatives last year that put 72 percent of the J. Crew U.S. trademarks, valued at $250 million, into a separate subsidiary and out of reach of lenders.

The company is trying to block lenders from declaring the debt to be in default.

The suit said “a sophisticated group of hedge funds and other lenders” with investments in the company’s $1.5 billion term loan “is presently seeking to exert improper pressure on J. Crew through baseless assertions that recent transactions consummated by J. Crew [and moving its intellectual property] breached the term loan agreement.”

The group of lenders has been working with Jones Day and installed Wilmington Savings Fund Society as agent for the term loan over the weekend, the suit said.

J. Crew argued the lenders “have taken — and continue to take — steps that are preventing J. Crew from realizing the benefits of this transaction.” The suit goes on to describe the lender’s action as “nothing more than a thinly veiled ploy to hold J. Crew hostage and improperly extract financial value to benefit the interests of the ad hoc group at the expense of J. Crew and its other stakeholders.”

The retailer said the lenders’ effort “threatens to cause imminent and substantial disruption to J. Crew’s business operations, and waste the months of planning and millions of dollars in legal and adviser fees.”

Wilmington Savings Fund Society declined to comment on the pending litigation and Jones Day did not immediately respond to queries on the suit.

Just how strong J. Crew’s case is will become more clear once the other side weighs in, said Nick Williams, distressed debt analyst at Reorg Research.

“It’s very early days,” Williams said. “The big shoe left to drop is what is the term loan lenders’ public response going to be.”

While J. Crew hasn’t gone into detail about just what strategic options are unlocked by moving the trademark into a separate subsidiary, Williams said there was speculation that the company could borrow money against the subsidiary and use it to pay down bonds coming due in 2019.

Although terms were not revealed, J. Crew is able to continue using the trademark under what the suit describes as “an exclusive, non-transferable license agreement.”

Williams said the company is presumably paying a fee to the subsidiary and it’s that cash flow that could be borrowed against.

In early December, debt watchdog Moody’s Investors Service downgraded the $2.1 billion in debt tied to J. Crew — through indirect parent Chinos Intermediate Holdings A Inc. — and said the retailer had a “very high leverage and an unsustainable capital structure.”

Moody’s cut Chinos’ corporate family credit rating two spots, to “Caa2” from “B3.”

The retailer said Wednesday that it has more than $400 million available in cash and under its asset-backed loan and was financially stable.

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