Byline: Sidney Rutberg

NEW YORK — To help nail down a deal, The Texas Pacific Group has reportedly altered the terms for its leveraged buyout of J. Crew Group by reducing the debt of the surviving company by about $49 million.
As a result, Moody’s Investors Service has upgraded the credit rating of a bond issue by parent J. Crew Corp. to help finance the deal. The upgrade should help the sale of $315 million in junk bonds being conducted through a private placement and enable the planned purchase to go forward.
To reduce the debt, Texas Pacific has increased the capital being injected in the business by $20 million, reduced the purchase price by $20 million to about $540 million, and added $9 million to J. Crew’s coffers by selling receivables, according to reports Tuesday in the bond market.
As reported, Texas Pacific plans to buy 88 percent of J. Crew. The deal was threatened when a bond issue representing a major piece of the financing was canceled last Friday. The withdrawal followed reports that third-quarter results at J. Crew were below expectations and September same-store sales of the retail division were down 13.6 percent.
With the reduction of post-purchase debt, Moody’s raised the rating of $175 million in senior subordinated debentures to B3 from Caa1. Moody’s said Tuesday that “the upgrade reflects lower debt at the operating company as a result of a reduced purchase price for the company,” reduced bank debt and other credit enhancements.
The rating of another part of the financing, $140 million in discount debentures (zeros) to be issued by the holding company of J. Crew Corp., has been affirmed at Caa2. Moody’s said that holders of the discount notes “do not significantly benefit from the changes to the capital structure.”
According to reports in the high-yield bond market, in addition to the upgrade, the interest rate on the senior subordinated notes, which mature in 2007, will be increased to 10 1/4 percent from 10 percent and the yield on the zeros will be raised to 13 percent from 12 7/8. The zeros mature in 2008.
The debt issues were to be privately placed through Donaldson, Lufkin & Jenrette, and Friday’s cancellation was regarded in the bond market as highly unusual.
However, according to high-yield bond analysts, the deal is once again a “go.”
One analyst said that DLJ has already resumed marketing efforts on the bonds.
The changes made by Texas Pacific were widely expected among bond analysts earlier this week.
The Texas Pacific deal also provides for Emily Woods, chief designer at J. Crew and daughter of the founder Arthur Cinader Sr., to hold 12 percent of the equity.
Texas Pacific, a $2.5 billion investment partnership based in Fort Worth, Tex., and San Francisco, could not be reached for comment. Neither would J. Crew or DLJ comment. There has been no official confirmation by any of the principals in the deal that the purchase was in the works.
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.
These observations were repeated in Tuesday’s upgrade.
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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