J.Crew files for Chapter 11 protection

July 2020 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

July 2020 Issue

In May, J.Crew became the first major US retailer to succumb to the financial pressures caused by the COVID-19 pandemic as it filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court for the Eastern District of Virginia.

In announcing its bankruptcy filing, J.Crew said it hopes the move will help it get its finances in order while it continues to operate, though for now under COVID-19 restrictions. In total the company operates 181 J.Crew stores, 140 Madewell stores and 170 J.Crew Factory stores.

Prior to the outbreak, the company had experienced financial difficulty. J.Crew had narrowly avoided bankruptcy in recent years as its debt ballooned to nearly $1.7bn following a $3bn leveraged buyout by private equity firms TPG Capital and Leonard Green & Partners in 2011. Prior to the COVID-19 outbreak, the company had intended to pay down some of its existing debt through an infusion of cash from spinning off its more casual and youthful subsidiary brand Madewell. However, that public listing was suspended in the spring, and now appears untenable during the market upheaval caused by the coronavirus.

The company, which leases all its stores, disclosed in a court filing that it had hired a real estate consultancy and liquidator to help it evaluate its leases and negotiate rent relief. Permanent store closings are possible.

Following the filing, J.Crew announced it had reached an agreement with its lenders holding approximately 71 percent of its term loan and approximately 78 percent of its IPCo notes, as well as with its financial sponsors, under which the company will restructure its debt and deleverage its balance sheet.

J.Crew’s lenders agreed to convert $1.65bn of its debt into equity. The company also announced it had secured commitments for a debtor-in-possession (DIP) financing facility of $400m and committed exit financing provided by existing lenders Anchorage Capital Group, L.L.C., GSO Capital Partners and Davidson Kempner Capital Management LP, among others. Subject to court approval, the DIP financing, combined with the company’s projected cash flows, is expected to support its operations during the restructuring process.

“This agreement with our lenders represents a critical milestone in the ongoing process to transform our business with the goal of driving long-term, sustainable growth for J.Crew and further enhancing Madewell’s growth momentum,” said Jan Singer, chief executive of the J.Crew Group. “Throughout this process, we will continue to provide our customers with the exceptional merchandise and service they expect from us, and we will continue all day-to-day operations, albeit under these extraordinary COVID-19-related circumstances. As we look to reopen our stores as quickly and safely as possible, this comprehensive financial restructuring should enable our business and brands to thrive for years to come.”

“J.Crew and Madewell are two classic American brands with deeply loyal customers,” said Kevin Ulrich, chief executive of Anchorage Capital Group. “The significant deleveraging contemplated by this agreement, coupled with J.Crew Group’s strategy to strengthen its robust e-commerce platform to drive continued growth in its direct-to-consumer segment, will position the Company for future success.”

Of course, J.Crew will not be the only retailer to experience financial difficulty in the coming months. According to BoF and McKinsey & Company’s coronavirus update to the ‘State of Fashion 2020’ report, released in April, more than 80 percent of fashion firms will find themselves in financial distress if lockdowns last longer than two months.

March sales at stores and restaurants across the US had their most severe fall on records dating back to 1992. Clothing sales fell more than 50 percent in March and the situation has subsequently grown worse as more lockdowns have been introduced.

J.Crew’s overall company sales increased 2 percent last year to $2.5bn. The company posted a $78.8m net loss during its most recent fiscal year, an improvement on the $120m loss the year before.

Richard Summerfield