J.Crew consults with restructuring advisor

08 November 2016

by Reshmi Basu, and Madalina Iacob

 

J.Crew management is working with advisor Lazard to explore balance sheet restructuring options, according to three sources familiar with the matter.

 

The mandate follows the retailer’s talks last month with different investment banks on how to fix the over-levered capital structure, the sources continued. Given that the company’s nearest maturity isn’t until 2019 and the revolver is still untapped, sponsors TPG and Leonard Green have been looking for ways to extend their equity optionality. However, the depressed retail environment and J.Crew’s downward earnings trend could put added pressure on the credit, depending on how holiday season sales stack up.

 

Recent performance has been slammed by a highly promotional retail environment combined with lackadaisical brick-and-mortar traffic, prompting the borrower to safeguard its liquidity coffers. On 28 October, the New York-based retailer elected to continue PIKing its USD 500m 7.75%/8.5% senior PIK toggle notes due 2019. The PIK election will increase the outstanding principal balance of the PIK Notes by USD 23.1m to USD 566.5m.

 

The borrower’s USD 1.5bn L+ 300bps (1% floor) term loan due 2021 is quoted 71.417/73, according to Markit. The USD 500m 8.5% PIK holdco notes due 2019 last changed hands at 42 on 26 October, compared to a 38 context in early October, according to MarketAxess.

 

Some investors have already theorized that management could pursue a distressed bond exchange and/or a sale of the Madewell brand as a means to chipping away at leverage.

 

As of 28 October, the issuer had USD 329m of availability under its USD 350m ABL facility with no outstanding borrowings. Cash as of 29 July was USD 49m.

 

For 2Q16, the issuer reported USD 38.3m of EBITDA, down from USD 41m in the prior-year period. Total sales decreased to USD 569.8m, down 4% YoY. By segment breakdown, sales for the namesake brand declined 6% to USD 476.7m, underscored by a 9% same-store sales decline. Meanwhile its growth engine, Madewell, grew its sales by 15% to USD 78.3m in 2Q, underpinned by a 3% same-store sales increase.

 

As of 2Q16 ended 30 July, J.Crew’s leverage stood at 10.9x based on LTM EBITDA of around USD 188m and USD 2bn of debt.