A rush of COVID-19 bankruptcies is giving lenders a new seat at the table in fashion.
Usually it’s the equity owners who call the corporate shots, appointing the board that picks the chief executive officer, who in turn sets strategic direction and leads the business.
Lenders have influence in good times, but not as much as the shareholders. The debt set is usually forced to — or content to — stay quiet, as long as the company they loaned money to stays current, making interest payments and paying back loans.
But with the coronavirus shutting down much of the consumer world for two months and counting, the debt crowd is coming to the fore — and much quicker than anybody expected.
J. Crew Group, Neiman Marcus Group, J.C. Penney Co. Inc. and Centric Brands were all in weakened positions coming into the year and ultimately couldn’t withstand the crisis, heading to bankruptcy court in a set of rapid-fire Chapter 11 filings.
Lenders are coming off the sidelines and are taking a very active approach, effectively doubling down on their investments by giving companies debtor-in-possession financing to see the companies through bankruptcy and setting themselves up as owners.
Much remains to be worked out by the courts, but the outlines of the future are becoming clearer for some.
• J. Crew is on track to be owned by a group of lenders that includes Anchorage Capital Group, GSO Capital Partners and Davidson Kempner Capital Management, which gave the retailer $400 million in DIP financing headed into bankruptcy.
• Neiman Marcus is set to be owed by lenders TPG Specialty Lending, Pimco and Davidson Kempner, which contributed to the department store’s $675 million in DIP financing and a $750 million exit financing package.
• Centric, which owns Zac Posen and Robert Graham and also makes goods for Tommy Hilfiger and others, is set to see private equity giant Blackstone exchange its second lien debt for an equity interest.
At J.C. Penney, the picture was still murky right up until the company filed on Friday, and much still needs to be worked out.
Initially, there were two groups of lenders. The first group was led by H/2 Capital Partners and included Brigade and Sculptor, while the other group was led by companies including Silver Point, KKR, Owl Creek, Sixth Street Partners and Apollo, said Penney’s attorney Josh Sussberg of Kirkland & Ellis at a court hearing Saturday.
“And we vigorously engaged with both groups, but we encouraged those groups to ultimately merge,” Sussberg said. “And the focus, in all of the discussions, was figuring out a way to exit bankruptcy as quickly as we enter it.”
One source close to the situation said it’s still too early to know just who will control the embattled company as it exits, although it is H/2 that is said to be the biggest of the first-lien lenders.
But gaining control is just step one. The question for the other side of bankruptcy will be just what kind of owners these distressed debt investors will be.
Will they seek to simply flip the businesses and make a return on their investment? Or will they settle in as retailers themselves and try their hand at keeping consumers satisfied?
Retail has an allure of its own.
Richard Baker was a dealmaker and real estate specialist when he started buying retailers, including Hudson’s Bay and Saks Fifth Avenue, building up Hudson’s Bay Co. Retail has been a tough business for Baker in recent years, who sold off Lord & Taylor, a European retail business and took HBC private this year.
But even so, Baker is still said to be keen to gain control of Neiman Marcus to combine it with Saks — a notion supported by some of Neiman’s lenders. Clearly, he still has something of the retail bug.
With so many lenders suddenly set to get their turn at the wheel as equity owners, some new players will find themselves at home and try to reinvent the industry themselves.
Names to Know as Debt Becomes Equity
A string of bankruptcies is set to give new voice to debt investors who might suddenly find themselves as retail owners.
|Company||Lenders Looking To Be Owners|
|J. Crew Group||Anchorage Capital Group|
|Davidson Kempner Capital Management|
|GSO Capital Partners|
|Neiman Marcus Group||Davidson Kempner Capital Management|
|TPG Specialty Lending|
|Source: Company reports.|