J.Crew store in the Shadyside in Pittsburgh

J. Crew Group’s bond investors gave a hardy thumbs-up to the company’s plan to rework its finances, but Standard & Poor’s said the offering would amount to “a de facto restructuring and a default on the company’s obligations.”

And even if the deal goes through and incoming chief executive officer James Brett has until the company’s term loan comes due in 2021 to turn around operations, he’ll still be carrying a significant debt load.

For now, holders of the $567 million in payment-in-kind notes that come due in May 2019, seem happy. The notes, which had been trading at 51 cents on the dollar, jumped to 59.5 cents since the deal was laid out late Monday. The retailer’s parent, Chinos Intermediate Holdings A Inc., technically holds the debt.

The private exchange offer would have affiliates of the company buy all outstanding notes for $250 million in new secured notes, which are backed up by a subsidiary holding the J. Crew name; as well as receive $190 million in new preferred stock issued by the firm’s corporate parent and 15 percent of its common stock.

Investors holding two-thirds of the notes had already signed onto the deal, which requires 95 percent buy-in.

S&P debt analyst Helena Song said, “We view the transaction as distressed because the participating note holders will receive significantly less than par value.”

“Once the transaction is completed…we expect to lower the corporate credit rating to ‘SD’ (selective default) and the issue-level ratings on the PIK notes to ‘D’ (default),” S&P said. “According to our criteria, we view the below-par tender of debt as distressed and, hence, a de facto restructuring and a default on the company’s obligations.”

Although it’s difficult to determine just who holds the debt today, it is likely that most investors who bought the notes when they were issued sold as the price dropped. For many investors today, the exchange offer might well represent a premium compared with their purchase price.

As part of the rejiggering, J. Crew is also looking to tweak its $1.5 billion term loan while making a $150 million payment at par (the loan had been trading at 70 cents on the dollar).

Debt watchdog Moody’s Investors Service held rating on the firm’s debt at “Caa2” with a negative outlook.

“The debt exchange will be credit positive because it provides J. Crew with runway through 2021 to execute on its operational turnaround, and also lowers its debt load,” said Raya Sokolyanska, Moody’s lead analyst for the retailer’s credit. “However, it will still leave the company with unsustainably high leverage, at a time when prospects for requisite earnings growth sufficient to support the heavy debt burden remain highly uncertain.”

Moody’s noted that a majority of the company’s free cash flow after the transaction would be used to pay licensing fees to the subsidiary holding the J. Crew trademark. That subsidiary, which the company set up last year and is the subject of a legal battle in New York state court, would use the proceeds to pay interest on $250 in proposed new notes. Should the deal go through, the suit would be dropped.

Brett, who most recently worked at West Elm, takes the reins from Millard “Mickey” Drexler on July 10, about when the financing reworking is scheduled to be completed.

He steps into a situation with tons of moving parts.

J. Crew has styles filtering in from chief design officer Somsack Sikhounmuong, it’s closing at least 20 stores this year and is cutting 150 workers from its headquarters staff.

And first-quarter losses, worsened by impairment and severance charges, widened to $123.3 million as revenues dropped 6 percent to $532 million.

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