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Photograph by David Paul Morris / Bloomberg


J.Crew is the latest retailer to consider bankruptcy. He could drop off as early as this weekend and is in discussion about a loan that would keep him in business during a bankruptcy process, according to the news.

It is one of many retailers reportedly preparing to restructure after more than a month of store closings to prevent the spread of the coronavirus. Neiman Marcus, Lord & Taylor and


JC Penney
(JCP) would all consider filing cases.

Unlike his peers, however, J.Crew already has a significant and controversial presence in the debt markets. The company declined to comment.

The influence of private enterprise extends well beyond the $ 1.7 billion debt it owed at the end of last year– a heavy burden on the retailer, which had only $ 26 million in cash, but not significant for the high-yield debt market of over $ 2 trillion.

J.Crew’s name has become synonymous with a debt market maneuver that raised eyebrows in 2017. The company used a loophole in its debt contracts to transfer a substantial amount of its intellectual property and value of its brand in a subsidiary.

This has put it out of the reach of senior lenders, who are supposed to have the most significant rights to the company’s assets. He then used this subsidiary to negotiate a debt swap with a group of junior bondholders.

Similar maneuvers have been used by other stressed-out retailers, such as Claire’s Stores and Neiman Marcus. But investors and analysts still call it the “J.Crew trap.”

So it’s no surprise that credit analysts objected to terms of a J.Crew plan to pay off debt with the proceeds of Madewell’s first public offering, a brand she launched. in 2006. S&P Ratings and Moody’s said in December that the terms originally proposed for the Madewell transaction would constitute a default on the company’s loans, rather than a repayment.

“We believe the indicative terms… indicate that lenders would receive less than what was originally promised,” S&P said. “We would probably consider that to be tantamount to a fault.”

J.Crew decided to set aside Madewell’s IPO in March, according to a business file, a decision that led him to would consider bankruptcy.

No matter how a restructuring or bankruptcy process goes (restructuring, liquidation or something in between) J. Crew’s legacy is likely to persist in the debt markets for some time.

For example, take a bond offer last week from



Difference
Inc.

(GPS), a retailer itself facing some financial pressure. As Gap marketed the deal, which ended totaling $ 2.25 billion, investors insisted on a contractual arrangement known as “J.Crew Blocker,” according to Covenant Review, a company that analyzes debt contracts.

The Blocker provision is intended to prevent the kind of asset transfer that J.Crew made about three years ago.

“Gap was probably the first deal during the COVID-19 era to include a J.Crew blocker” because retail debt investors had a prominent place in J.Crew’s maneuver years ago, wrote Ross Hallock, analyst at Covenant. Review. “However, we believe this type of investor protection is appropriate in any transaction. [where such a transfer is possible], whatever the sector.

Write to Alexandra Scaggs at [email protected]


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