J. Crew Group Inc.’s deepening fight over the rights to its intellectual property may have some lenders up in arms, but other retailers could be taking notes.
J. Crew has found itself in an increasingly messy debt situation — fighting in court with a group of $1.5 billion term loan lenders over who gets to do what with a majority of the retailer’s IP assets worth $250 million. But messiness aside, the company’s move to get its IP out of lender reach could signal possibility for other distressed brands with few tangible assets.
In a research note on the collateral drain posed by moving IP assets into unrestricted subsidiaries, which are often allowed in loan agreements to let debtors continue to invest in new business, Fitch Ratings mentioned Neiman Marcus as one retailer that could also use this “tactic” as it looks to reorganize its debt.
Going forward, Fitch will be “increasingly focused” on contract terms surrounding unrestricted subsidiaries, saying J. Crew’s move “illustrates how their intended use has changed.”
“Borrowers typically look to use the collateral as leverage in negotiating a distressed debt exchange with junior lenders once the collateral has been streamed away from the secured lenders,” Fitch noted.
That’s how it’s started with J. Crew, which in March proposed a distressed exchange with a separate lender group holding $500 million in PIK notes with the now-separate IP assets offered as security.
Although the retailer and its PIK note holders have been going back and forth over the terms of the exchange, it has yet to be finalized, according to filings with the Securities and Exchange Commission.
Neiman’s is also under a heavy debt that by some estimates currently exceeds that value of its underlying business, and while it has already put itself up for sale, it could make a financing move while it waits on a deal.
Hudson’s Bay is thought be the frontrunner for Neiman’s, but the length of any negotiating process, which likely started in mid-March, was expected to take only four to six weeks.
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