MOODY’S REPORT: TEXAS PACIFIC BUYS CONTROL OF J. CREW GROUP

NEW YORK — The Texas Pacific Group has acquired control of the J. Crew Group and is issuing a $125 million private placement to help finance the acquisition, according to a rating report by Moody’s Investors Service.
On Aug. 18, WWD broke the story that Texas Pacific, an investment firm headed by David Bonderman, was seeking to buy J. Crew.
J. Crew officials could not be reached for comment Monday.
Moody’s has given the senior subordinated notes and senior discount debentures involved in the private placement speculative ratings. The private placement is being managed by Donaldson, Lufkin & Jenrette, which declined to discuss the issues.
According to the Moody’s report, Texas Pacific has acquired 88 percent of the company from the founding family. Emily Woods, chief designer and founder of the J. Crew label, will hold 12 percent. Her father, Arthur Cinader Sr., chairman, is expected to retire, according to market sources. He started the J. Crew catalog in 1983.
Moody’s rated the notes Caa1. The debentures, which are being issued by J. Crew’s holding company, J. Crew Group Inc., were rated Caa2.
Moody’s said the firm is highly leveraged with thin fixed cost coverage.
It also noted that in the past, there have been inefficiencies in some parts of its business.
The agency also said that operationally, J. Crew has performed below some other catalog retailers both in fulfillment and inventory management.
On the plus side, Moody’s cites J. Crew’s “very strong brand equity and recognition by its target audience, the expectation of reduced costs in the future as a result of both realized and potential actions, and the high productivity of its growing store base as a result of its location strategy.”
J. Crew’s revenues came to about $800 million in 1996. About half of the revenues from the J. Crew brand came from catalog operations. In addition to the J. Crew apparel operations, the company owns two non-core catalogs, Popular Price Club and Clifford & Wills. These have underperformed the J. Crew branded business and Moody’s expects them to be put up for sale soon. The sale of these operations would improve J. Crew’s balance sheet as well as operating profits and cash flow, the agency said.
In addition to the private placement, Moody’s rated J. Crew’s $340 million in bank lines. These were rated B1, a much higher grade than the private placements because they were collateralized by virtually all the assets of the company.

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