What’s J. Crew Group really worth?
The bankrupt retailer’s unsecured creditors believe the company is seriously underestimating the value of the business, alleging it is doing so in order to shortchange them on recoveries.
The valuation gap is a substantial one — more than $1 billion.
The unofficial creditors’ committee in the case argues that its experts had conducted an “extensive investigation” of J. Crew’s finances and assets, and found that the company’s enterprise value was roughly $2.94 billion. That estimate places a significantly higher value on the business than J. Crew’s own revised estimate of $1.84 billion.
“The debtors, along with their secured lenders, have grossly undervalued the debtors’ business (and overvalued certain collateral assets) in order to push through a plan which shifts significant value to the debtors’ secured lenders at the expense of general unsecured creditors which are rightly entitled to such value,” the creditors’ committee said in a filing in Virginia bankruptcy court.
The estimates of a company’s value are important in bankruptcy cases, because they can determine the pool of available recoveries for unsecured creditors. If a company’s reorganization plan reflects that a company is worth more than what its secured lenders are owed, that extra value would be available for unsecured creditors to recover from.
Here, J. Crew’s unsecured creditors argue that the company is worth substantially more than what its lenders are owed. J. Crew’s general unsecured creditors, including trade vendors, landlords and others, estimate they are owed roughly $150 million to $200 million in claims. In a bankruptcy, general unsecured creditors are fairly low in the hierarchy of who gets repaid, and usually stand to recover a fraction of what they are owed. That dynamic often results in contentious discussions around valuations.
The creditors’ committee is also seeking to file its expert reports containing their valuation estimates under seal, as it hashes out with J. Crew which of the information contained in the reports needs to be kept confidential, and whether redacted versions of the reports can later be filed publicly.
So far, the parties have exchanged valuation reports, and over the next week or so, they will be deposing their valuation experts.
The unsecured creditors’ committee has also argued in its filing that the retailer’s reorganization plan favors secured lenders by overestimating the value of some of their loan collateral, namely the company’s intellectual property.
J. Crew’s reorganization plan has proposed a $1.65 billion debt-for-equity swap, and $400 million in “new money commitment backstopped by their plan sponsors,” according to court documents. The creditors’ committee’s arguments so far indicate it will be filing formal objections to the plan. The deadline to file those objections is Aug. 17.
The Virginia bankruptcy court overseeing the case is expected to hear the creditors’ contentions at J. Crew’s plan confirmation hearing, which is scheduled for Aug. 25.
A representative for J. Crew declined to comment.
J. Crew was among the first major apparel retailers to file for Chapter 11 after the coronavirus pandemic began, when it did so in May. The retailer said at the time that store closures in response to the pandemic had led it to furlough some 11,000 employees of its roughly 13,000 employees around the world.
Since then, the retailer’s time in bankruptcy court has followed a now-familiar path. It entered the proceedings with a plan to reorganize and shed its significant debt, and had successfully sought a deferment of rent payments, as a number of other retailers in bankruptcy during the pandemic have also done.
J. Crew has said it was undertaking a “phased” reopening of its 500 stores, and its web site says it has opened a “majority” of its stores.
The retailer has said also it has implemented a number of measures embraced by retailers that have reopened stores during the pandemic, including limiting the number of customers who can enter its stores, requiring customers to wear face masks and reducing store hours, among other measures.
The retailer had entered into the Chapter 11 proceedings with the goal of emerging with a confirmed reorganization plan by September. Its advisers have told the court in recent hearings that the company is on track to meet those deadlines.