CANCELLATION OF BONDS THREATENS J. CREW DEAL

Byline: Sidney Rutberg

NEW YORK — The $560 million acquisition of J. Crew Corp. by Texas Pacific Group may be in trouble.
Two bond issues that were to be privately placed through Donaldson, Lufkin & Jenrette and used to help finance the deal have been canceled, Wall Street sources said Monday.
The issues — $175 million in senior subordinated notes priced to yield 10 percent and $140 million in 12 7/8 percent discount notes (zeros) offered for sale at about 54 percent of par — have been withdrawn, according to the sources.
A high-yield analyst, who requested anonymity, said the cancellation was very unusual in the bond market, noting that the deal was placed on Oct. 1 and canceled on Oct. 10. “The bonds were already trading,” the analyst said.
The reason the issues were withdrawn, according to the Wall Street reports, is that third-quarter business at J. Crew, the catalog and retail operation, has been much slower than expected. Same-store sales of the J. Crew retail chain were down 13.6 percent in September, according to the reports, with a 5 percent dip in comp-store sales expected for the balance of the year.
Texas Pacific is expected to modify the deal so that the bond issues would be more marketable. The reports on Wall Street indicate that Texas Pacific will shave $20 million off the purchase price, add $20 million in additional equity into the surviving company and sell $9 million more of Crew’s credit card receivables.
Texas Pacific is a $2.5 billion private investment partnership based in Fort Worth, Tex., and San Francisco. Under the deal, Texas Pacific was to gain control of 88 percent of J. Crew, with the other 12 percent to be held by Emily Woods, chief designer and daughter of Arthur Cinader Sr., the founder of J. Crew. Cinader is expected to retire.
The deal has never been officially announced, but information that a deal was in the making was obtained from a rating report by Moody’s Investor Service and from the high-yield bond market.
Neither Texas Pacific nor J. Crew officials could be reached for comment Monday on the latest reports. Officials at Donaldson, Lufkin & Jenrette were also unavailable.
Late last month, Moody’s rated the senior subordinated notes at Caa1 and the zeros, which are to be issued by J. Crew Group, the holding company for J. Crew Corp., at Caa2.
In rating the issues, Moody’s noted that the company is highly leveraged with thin coverage of its fixed costs. It also noted that operationally, the company has performed below some of its catalog competitors.
However, the agency did note that J. Crew is a strong brand and the company had the potential to reduce costs and increase productivity.
Last year, J. Crew’s revenues were about $800 million, with about half the revenues coming from the J. Crew brand catalog.

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