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May 3, 2020 – Chinos Holdings, Inc and one affiliated Debtors (“J.Crew Group” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Virginia, lead case number 20-10343. The Debtors, an omni-channel retailer of women's, men's and children's apparel, shoes and accessories, are represented by Tyler P. Brown of Hunton Andrews Kurth LLP. Further board-authorized engagements include (i) Weil, Gotshal & Manges LLP as general bankruptcy counsel, (ii) AlixPartners, LLP as restructuring advisors, (iii) Lazard Frères & Co. LLC as investment bankers and (iv) Omni Management as claims agent.
Anchorage Capital Group and other members of an ad hoc committee are represented by Milbank LLP as legal counsel and PJT Partners LP as investment banker, respectively.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $10.0bn and $10.0bn. In its most recent 10-Q, the Debtors listed assets of $1.76bn and liabilities of $3.11bn (long-term debt at $1.66bn). These numbers move slightly in the Debtors' first quarter 2020 results press release.
Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) Deloitte Consulting (with a staggering $22.7mn professional services claim), (ii) Cosmic Gear Ltd ($14.3mn trade debt), (iii) Sterling Apparel Ltd ($13.7mn trade debt), (iv) RGM Fashion Ltd. ($12.6mn trade debt) and (v) Fashion Accessories ($11.1mn trade debt). All 30 of the Debtors top 30 unsecured creditors hold claims in excess of $3.7mn with other notable claims holders including Deloitte again (Deloitte Tax LLP) with a $4.0mn professional services claim and (tucked in at the bottom of the list) Wilmington Savings Fund Society, FSB with a $1.342bn prepetition term loan deficiency.
In a press release announcing the filing, J. Crew advised that it “has reached an agreement with its lenders holding approximately 71% of its Term Loan and approximately 78% of its IPCo Notes, as well as with its financial sponsors, under which the Company will restructure its debt and deleverage its balance sheet, positioning J.Crew and Madewell for long-term success.
Under the terms of the Transaction Support Agreement (‘TSA’), the Company's lenders will convert approximately $1.65 billion of the Company's debt into equity.”
There has been much discussion in recent weeks as to Madewell and Madewell’s existing management, the press release clarifies: “As part of the TSA, Madewell will remain part of J.Crew Group, Inc. Libby Wadle will continue in her role as CEO of Madewell.” In earlier announcements relating to the TSA, the Debtors had stated that they were looking at strategic alternatives including the "separation of J.Crew and Madewell into two independent companies and a potential IPO of the Madewell business."
Jan Singer, The Debtors’ Chief Executive Officer, added: "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. 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."
Plan Overview and RSA
The Debtors have finalized the terms of a restructuring support agreement (the “TSA,” attached to the Nicholson Declaration at Exhibit B) with an ad hoc committee of prepetition lenders and noteholders (collectively, the “Ad Hoc Committee”) and the Debtors’ prepetition equity sponsors that collectively own or control approximately 71% of the Term Loans, 78% of the IPCo Notes, 66% of the Series A Preferred Stock, 92% of the Series B Preferred Stock, and 85% of the Common Stock.
The TSA, among other things, provides for $400 million of new money financing commitments and significant value to the Debtors’ stakeholders.
More specifically, under the TSA:
- Approximately $2 billion of the Debtors’ prepetition secured term loans and prepetition secured notes will be equitized into approximately 82% of the Debtors’ reorganized equity;
- Members of the Ad Hoc Committee have agreed to provide (a) debtor in possession financing in an aggregate principal amount of up to $400 million (the “DIP Loans”), the principal amount of which will be converted into new senior secured first lien term loans (the “New Term Loans”) on the effective date of a plan and (b) on the effective date, any additional New Term Loans not provided as DIP Loans during the chapter 11 cases (the “Additional New Term Loans”);
- Holders of Term Loans and IPCo Notes that are qualified institutional buyers or accredited institutional investors (each, an “Eligible Holder”) and that join the TSA within 10 business days of the Petition Date may elect to provide a portion of the DIP Loans and New Term Loans as set forth in the TSA;
- As consideration for the undertakings in the TSA, lenders of the New Term Loans will receive 15% of the common equity of the reorganized Debtors (the “New Common Shares”) and warrants to acquire additional New Common Shares after the effective date;
- General unsecured creditors that provide goods and services necessary to the operation of the reorganized Debtors and enter into a trade agreement with the Debtors within 30 days of the Petition Date will receive their pro rata share of cash in an aggregate amount equal to $50 million, subject to a 50% cap on claims;
- Other general unsecured creditors, including for claims on account of the Debtors’ rejection of unexpired executory contracts and lease agreements, will receive their pro rata share of cash in an aggregate amount equal to (a) $3 million if the class votes to accept the plan and otherwise (b) $1 million if the class votes to reject the plan, subject to a 50% cap on claims; and
- All prepetition equity will be cancelled and will receive no recovery.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Nicholson Declaration”), Michael J. Nicholson, the Debtors’ President and Chief Operating Officer the detailed the events leading to the Debtors' Chapter 11 filing. The Nicholson Declaration provides: "Although the Debtors’ business enterprise is operationally sound, the Debtors have substantial long-term funded debt and lease obligations that they must restructure. In addition, in recent weeks, the Debtors have been heavily impacted, like many of their retail peers, by the unprecedented and evolving global pandemic, COVID-19. Through these chapter 11 cases, the Debtors will have the opportunity to address their substantial indebtedness and lease obligations while allowing the Debtors to raise additional capital to fund their operations and make strategic investments to allow them to emerge as a stronger global enterprise.
The specialty retail industry is highly competitive and, in recent years, the retail industry as a whole has been challenged by shifts in consumer purchasing preferences and habits. The Debtors primarily compete with specialty retailers, department stores, and e-commerce businesses that engage in the sale of women’s, men’s and children’s apparel, accessories, and similar merchandise. The Debtors are not in the business of 'fast fashion' and pride themselves on long-lasting merchandise, quality designs, and attentive customer service. Nevertheless, the Debtors face increasing competition from 'fast fashion' retailers due to their aggressive pricing strategies.
Moreover, economic conditions around the world have impacted the Debtors’ customers and affected the general business environment in which the Debtors operate and compete. Because apparel and accessories generally are discretionary purchases, consumer purchases of the Debtors’ products have declined when consumer disposable income is lower. As a result, the Debtors’ sales, growth, and profitability have been adversely affected by unfavorable economic conditions across the United States and abroad. In addition, unfavorable economic conditions abroad have impacted the Debtors’ ability to meet production goals. As noted previously, approximately 87% of the Debtors’ merchandise is sourced in Asia, with approximately 45% of the Debtors’ products sourced from mainland China and 12% sourced from Europe and other regions. Each of those regions have been particularly affected by COVID-19 and have faced significant prolonged shutdowns, which has affected the Debtors’ ability to obtain supplies and finished goods from those areas. Although the Debtors believe their quality, design, customer service, and price remain a compelling proposition over the long term, the Debtors have not been immunized from these broader trends, particularly in light of COVID-19.
Over the past several years, the Debtors’ significant funded debt, as set forth above, and the attendant debt service obligations, have restricted the Debtors’ liquidity and growth.For example, the Debtors paid approximately $143 million in fiscal year 2019 for cash interest expense alone. The debt service obligations impacted the Debtors’ ability to make capital expenditures, including to refresh store locations, drive growth initiatives, and further enhance their customer experience. The Debtors also have substantial fixed contractual commitments,including, as noted above, $23 million of monthly lease obligations.
The Nicholson Declaration provides: "In late February 2020, the Debtors began to face unprecedented liquidity and operational challenges with the spread of COVID-19. Though many companies across all industries faced hardships and tumultuous market conditions, the Debtors were uniquely and severely impacted as a customer-facing retailer in an already struggling industry. The Debtors quickly encountered, among other things, (a) a steep decrease in net sales across their business lines and (b) inability of the Debtors’ foreign vendors to operate, produce, and ship merchandise. By early March 2020, the Debtors were forced to close all retail stores consistent with governmental health guidelines and directives. The Debtors have been relying primarily on e-commerce activities. As noted, the Debtors expect a loss of almost $900 million in sales due primarily to store closures across all brands. As a result of the foregoing, the Debtors have experienced a steep drop in revenue, which forced the Debtors to employ liquidity preservation measures.
DIP and Exit Financing
The Debtors have secured commitments for a $400.0mn debtor-in-possession ("DIP") financing facility and committed exit financing provided by existing lenders Anchorage Capital Group, L.L.C., GSO Capital Partners and Davidson Kempner Capital Management LP, amongst others.
Lease Negotiations and Rejections
The Nicholson Declaration provides: “The Debtors lease all of their retail store locations from approximately 140 landlords and are party to approximately 500 unexpired leases of nonresidential real property, located in nearly every state. Most of the Debtors’ lease agreements have terms typically between five and ten years. The Debtors have approximately $23 million in monthly lease obligations.
Beginning in early April 2020, after several weeks of government mandated store closures and uncertainty as to the duration and resulting impact of the pandemic, the Debtors began to evaluate their lease portfolio to, among other things, quantify and realize the potential for lease savings. In furtherance of the comprehensive lease strategy, the Debtors with the assistance of their real estate advisors, Hilco Real Estate, LLC (‘Hilco’), will begin communicating with landlords in an effort to improve lease terms. If certain accommodations with landlords are not achieved, the Debtors likely will reject certain burdensome leases and close the related stores. Contemporaneously herewith, the Debtors have filed the Lease Rejection Procedures Motion (as described below) seeking authority to implement procedures to reject unexpired nonresidential real property leases and related subleases and the abandonment of certain de minimis property in connection therewith."
As of the Petition date, the Debtors’ prepetition capital structure includes approximately $2.0bn in funded debt.
Approximate Principal Amount ($ millions)
Total Funded Debt
- Prepetition ABL: The Debtors are party to an April 2011 credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A. as administrative agent, collateral agent, lender and issuer, further to which BoA and other lenders have furnished the Debtors with an asset-based revolving credit facility (the “ABL Credit Facility”). As of the Petition date, there was approximately $311.0mn in principal amount outstanding under the ABL Credit Facility and approximately $64.0mn of outstanding but undrawn letters of credit to secure the Debtors’ obligations with respect to their workers’ compensation policies, certain leases, customs bonds, and inventory. The ABL Credit Facility matures on December 4, 2020.
- Term Loans: The Debtors are party to a March 2014 amended and restated credit agreement (the “Term Loan Agreement”) with Wilmington Savings Fund Society, FSB as administrative agent and collateral agent, and the other lenders from time to time party thereto (collectively, the “Term Lenders”), pursuant to which the Term Lenders agreed to provide the Debtors with a term loan in the initial principal of approximately $1.57 billion (the “Term Loans”). As of the Petition date, approximately $1.34bn in principal amount of Term Loans remain outstanding. The Term Loans will mature on March 5, 2021.
- IPCo Notes: Pursuant to the terms of a pair of July 13, 2017 indentures (U.S. Bank National Association serving as trustee and collateral agent), Debtors J. Crew Brand, LLC (“Brand”), J. Crew Brand Corp. (“Brand Corp., and together with Brand, the “IPCo Issuers”), the Debtors issued $97.0mn of 13.00% Senior Secured Notes due 2021 (collectively, the “IPCo New Money Notes”) and $250.0mn of 13.00% Senior Secured Notes due 2021 (the “IPCo Exchange Notes”, and together with the IPCo New Money Notes, the “IPCo Notes”).The IPCo Notes mature on September 15, 2021.
Prepetition Equity Holdings
- TPG Capital, L.P.: 55% of the Debtors’ common stock (the “Common Stock”) and approximately 66.2% of Holding’s 7% non-convertible perpetual series B preferred stock (the “Series B Preferred Stock”).
- Leonard Green & Partners LP: 20.7% of the Common Stock and approximately 24.8% percent of the Series B Preferred Stock.
- Anchorage Capital Group, L.L.C.: 25.6% of 7% non-convertible perpetual series A preferred stock (the “Series A Preferred Stock”).
- GSO Capital Partners LP: 26.1% percent of Series A Preferred Stock.
- Goldman Sachs & Co. LLC: owns approximately 15.5% of Series A Preferred Stock.
About the Debtors
J.Crew Group, Inc. is an internationally recognized omni-channel retailer of women's, men's and children's apparel, shoes and accessories. As of May 4, 2020, the Company operates 181 J.Crew retail stores, 140 Madewell stores, jcrew.com, jcrewfactory.com, madewell.com and 170 factory stores. Certain product, press release and SEC filing information concerning the Company are available at the Company's website www.jcrew.com.
The Nicholson Declaration adds: "Today, the Debtors are an internationally recognized multi-brand apparel and accessories retailer for young professionals and fashion-conscious men and women. With the J. Crew brand recognized as a household name for nearly four decades, the Debtors enjoy a strong reputation for providing their customers with stylish and quality products. In recent years, the Debtors have also seen fast and innovative growth from their Madewell brand, which offers a full product assortment rooted in premium denim and packaged in a cool, unexpected, and artful aesthetic.
The Debtors operate their retail stores under two distinct brands: (a) the J. Crew brand, which is the Debtors’ primary global brand used for both J. Crew stores and J. Crew factory outlet stores, and (b) the Madewell brand. The Debtors sell their merchandise in stores, online, as well as through partnered wholesalers, such as Nordstrom. The differentiation across the business lines allows the Debtors to operate multiple store locations in close proximity and to serve a wider demographic.
Before implementing a furlough program that began on April 1, 2020 as a result of the COVID-19 pandemic, the Debtors employed approximately 13, 000 individuals in the United States, Canada, the United Kingdom, China, Hong Kong, Vietnam, and India, approximately 4,000 of whom were employed on a full-time basis, and approximately 9,000 of whom were employed on a part-time basis (collectively, the 'Employees'). Due to store closuresin response to the COVID-19 pandemic, the Debtors made the decision to furlough approximately 11,000 Employees on an as-needed basis. As of the Petition Date, the Debtors employ approximately 2,000 active full-time Employees."
Corporate Structure Chart
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