J. Crew Group is clearly in a hurry.
The retailer is plowing ahead with its plans to execute a quick bankruptcy, as a Virginia bankruptcy court paved the way for the company to access much-needed cash and to pay its key vendors.
J. Crew’s effort at a fresh start, even as the duration of the coronavirus pandemic remains unpredictable, may hold signs for other major retailers reportedly hurtling toward Chapter 11, including Neiman Marcus Group and J.C. Penney. How J. Crew fares with its requests, and the judge’s willingness to accommodate them, may demonstrate what these and other firms can expect when navigating the bankruptcy process while stores remain shuttered and thousands of jobs hang in the balance, all while physical courtrooms are also harder to access.
In J. Crew’s first day hearing on Tuesday, which took place largely over a telephone conference, U.S. Bankruptcy Judge Keith Phillips said he would grant interim approval to the retailer’s proposed $400 million debtor-in-financing package. This initial approval would provide some $110 million in financing to the company during the bankruptcy, with another $145 million of the DIP to come after the final approval later in the process, and then more incremental financing after that.
A final hearing on the financing is scheduled for May 28.
Rather than needing to be repaid, the DIP financing would convert to exit financing, J. Crew’s attorneys said.
“We believe this is a tremendous advantage as [the company] looks to reorganize swiftly,” said Ryan Preston Dahl of Weil Gotshal & Manges LLP, which represents J. Crew in the proceedings.
The company also said that in light of its need to preserve relationships with key suppliers, it needs to pay certain pre-bankruptcy claims to its critical vendors, up to a $20 million vendor cap. On Tuesday, Phillips also granted that motion.
The move sets the stage for J. Crew, which filed for Chapter 11 protection on Monday, to implement its methodically pre-negotiated plans to reorganize through a planned debt-for-equity swap of some $1.65 billion in debt. The retailer had walked into the process with a deal in hand with its existing lenders, which include Anchorage Capital Group, GSO Capital Partners and Davidson Kempner Capital Management.
The retailer’s goal is to get its restructuring agreement confirmed by Sept. 1, according to court filings, and its attorneys emphasized the importance of its quick execution to the survival of a company that has roughly 13,000 employees, nearly a third of them full-time. During the COVID-19 pandemic, it has furloughed 11,000 employees, it said.
“Like many other retailers, we began to face unprecedented liquidity and operational challenges,” said Ray Schrock of Weil Gotshal, who also spoke at Tuesday’s hearing.
“No retailer, I believe, can withstand going to effectively very limited online revenue…and expect to come out of this relatively unscathed,” he said. “We are so pleased that we have a plan before you to reorganize J. Crew and Madewell, and help them deleverage and survive, and be stronger than ever.”
Issues that drew contention on Tuesday included DIP-loan related fees that were proposed not in the form of cash, but in “reorganized equity upon the effective date of a plan of reorganization,” according to J. Crew. Under the DIP proposal, participants in the restructuring agreement would receive 10 percent of the $400 million contemplated under the DIP Facility to be paid “in New Common Shares issued at the transaction enterprise value of $1.75 billion.” If J. Crew proceeds with an “alternative transaction,” rather than the planned restructuring, the fee would then be a cash one equivalent to roughly 3 percent of the total DIP facility, or $12 million, according to court documents.
The DIP facility also included as collateral a lien on the proceeds of avoidance actions, which are lawsuits against creditors who got paid by the company within 90 days before it filed for bankruptcy. Such lawsuits are theoretically meant to generate proceeds to repay unsecured creditors, the principle being to spread the losses and repayments more fairly when a company goes bankrupt.
“I do have some concerns about extending the lien to include avoidance actions,” said Phillips, adding that “I typically do not believe that’s appropriate.” But he said that he was willing to accommodate it “in light of the circumstances this debtor is in.”
“These are unusual times,” said Phillips.
J. Crew, which has sought to delay paying its $23 million monthly lease obligations for 60 days during the bankruptcy, said it will continue negotiating with its landlords. The issue will be heard at a hearing later this month.