May 1, 2017
Blackstone's GSO snaps up J. Crew debt in restructuring gambit
May 1, 2017
GSO Capital Partners, private equity firm Blackstone Group LP's credit arm, is acquiring more of J. Crew Group Inc's debt, hoping for a profitable trade that could also give the US fashion retailer more time to stave off bankruptcy, people familiar with the matter said.
Sales have been declining as J. Crew, whose ballet flats and cashmere cardigans were once a staple of middle-class US wardrobes, struggles to keep abreast of changing tastes and faces fierce competition from cheaper online retailers. It now has $2.1 billion in debt.
Most pressing is $567 million in unsecured bonds coming due in 2019. To cut that burden, J. Crew is trying to slash more than half the bonds' value by placing the intellectual property of its eponymous brand into a new company, but holders of other debt are resisting the move.
J. Crew has said it will then offer to exchange the bonds, which are backed by no collateral, for those from the new company backed by the brand. It will also offer equity to those bondholders.
Other indebted retailers will be watching the restructuring closely as competition from online rivals like Amazon has driven Aeropostale Inc, Payless ShoeSource and other chains into bankruptcy. "I imagine a lot of companies that have the ability to do this in their credit agreements are talking to their attorneys and thinking about creative options," Moody's Investors Service analyst Raya Sokolyanska said.
But holders of a $1.53 billion loan to J. Crew, including investment firms Eaton Vance Management and Highland Capital Management LP, have told the company its bond exchange would remove the intellectual property as their collateral, and they would consider that a default, the sources said. Eaton Vance and Highland did not immediately respond to requests for comment.
J. Crew has filed a lawsuit in New York State Supreme Court to prevent them from thwarting the exchange. What is more, some J. Crew bondholders have themselves been holding out for a better exchange offer, according to the company's public disclosures.
To try to resolve the impasse and increase its own chances of a profitable outcome, GSO, which owns some of J. Crew's bonds, has been buying chunks of the company's loan in the secondary trading market, according to the sources, who requested anonymity because the trade is not public.
GSO wants to amass a controlling position in the loan, which would allow it to give J. Crew a waiver to carve out its intellectual property without risk of any legal challenge, the sources said. The Blackstone unit is working with other creditors, including hedge fund Anchorage Capital Group LLC, which focuses on distressed debt.
J. Crew, GSO and Anchorage declined to comment.
GSO's plan could determine whether J. Crew manages to avoid bankruptcy. The company cannot afford to pay the bonds at face value when they come due in 2019, and credit rating agencies have warned it could face a liquidity crunch before then.
The proposed exchange would push back the maturity of J. Crew's bonds by two years, to 2021. This could give the company's private equity owners, TPG Capital LP and Leonard Green & Partners LP, enough time to turn the business around. TPG offered no comment, and Leonard Green did not respond to requests for comment.
In return for facilitating the exchange, GSO will ask J. Crew for an improved offer for its bonds, the sources said.
Reuters was unable to determine what GSO and Anchorage paid for their J. Crew debt. J. Crew's bonds trade at about 50 cents on the dollar, and the loan, which matures in 2021, trades at about 66 cents on the dollar, according to Thomson Reuters data.
PROS AND CONS
GSO and Anchorage may fail to amass a controlling position in the loan, the sources cautioned.
While buying J. Crew more time to try to fend off bankruptcy, the carveout would burden the company with sizable licensing payments to use its own brand, Moody's has warned.
Without GSO's intervention, however, J. Crew could be left in limbo as it battles its other lenders over the use of its brand, and it may end up in bankruptcy if it cannot cut a deal. Just the fact-discovery period in J. Crew's lawsuit could take more than six months, according to court filings.
TPG and Leonard Green took J. Crew private in 2011 in a $3 billion leveraged buyout. They subsequently added to the company's debt pile by having it borrow more to fund $787 million in dividends to them, according to Moody's.
The company sells its merchandise through its 281 J. Crew retail stores, 113 Madewell stores and 181 factory stores, as well as through websites and catalogs. It generated $2.4 billion in sales in the 12 months to the end of January, down from $2.5 billion in the prior year.
In its latest belt-tightening effort, J. Crew said last week it would eliminate 150 full-time and 100 open positions, primarily at its New York headquarters. It expects annualised savings of about $30 million from the job cuts.
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