LFI: Capital Structure: J. Crew sues Wilmington Savings, claims it is not in default of TL

J. Crew Group claimed in a lawsuit that the apparel retailer did not violate the terms of its $1.5 billion term loan when it invested intellectual property into an unrestricted subsidiary last month.

The New York-based company sued Wilmington Savings Fund Society FSB, the administrative and collateral agent on its term loan, in a complaint filed yesterday (Feb. 1) in the commercial division of the New York State Supreme Court.

“A sophisticated group of hedge funds and other lenders under the term loan agreement is presently seeking to exert improper pressure on J. Crew through baseless assertions that recent transactions consummated by J. Crew breached the term loan agreement,” J. Crew said in the lawsuit, noting it brought the suit to establish there has been no breach or event of default.

The lawsuit said Wilmington Savings, which has been the agent on the term loan since Jan. 29 (when it replaced Bank of America) and is acting on behalf of an ad hoc group of lenders, is preparing to issue an improper notice of default under the term loan agreement and commence litigation against J. Crew with respect to the IP transaction.

The ad hoc group holds more than 50% of the term loan, the lawsuit said.

The notice of default will assert J. Crew breached the term loan when it invested “a fraction of J. Crew’s intellectual property assets to certain of J. Crew Group’s ‘unrestricted’ subsidiaries, notwithstanding the existence of negotiated provisions in the term loan agreement that explicitly permit such an investment,” the lawsuit said.

The company’s subsidiary J. Crew International Inc. on Dec. 5 assigned a 72.04% interest in certain U.S. trademarks with a value of $250 million to J. Crew International Cayman Ltd. The assets were then moved through a series of transactions, ending up with J. Crew Domestic Brand LLC holding them. J. Crew Domestic Brand is an unrestricted subsidiary and is not party to the term loan.

The company used its permitted investment basket under the term loan agreement to do the transaction, since it allows restricted subsidiaries to make investment of assets with a value of up to $277 million in unrestricted subsidiaries.

J. Crew claimed in the suit that the ad hoc group and the agent have taken steps that are preventing the company from realizing the benefits of the IP transaction. “These steps threaten to cause imminent and significant disruption to J. Crew,” it said.

“Such actions by the ad hoc group…are nothing more than a thinly-veiled play to hold J. Crew hostage and improperly extract financial value to benefit the interests of the ad hoc group at the expense of J. Crew and its other stakeholders,” the lawsuit went on to say.

The legal actions are aligned with J. Crew’s continuing efforts to evaluate and pursue opportunities to strengthen its balance sheet, said company President, COO and CFO Mike Nicholson in a statement yesterday.
J. Crew, which is backed by buyout firms TPG and Leonard Green & Partners, is currently evaluating balance sheet options with advice from Lazard and Weil Gotshal & Manges LLP.

J. Crew is advised by Weil Gotshal and Kasowitz Benson Torres & Friedman LLP, as co-counsel for the lawsuit.
Jonathan Polkes at Weil Gotshal and Marc Kasowitz at Kasowitz Benson could not be reached for comment.
Wilmington Savings is advised by Jones Day LLP. The defendant could not be reached for comment today.
In addition to the term debt, the company also has a $350 million asset-based revolver, and its indirect parent holding company Chinos Intermediate Holdings A Inc. has $500 million of  7.75%/8.5% senior PIK/toggle notes due 2019.

The company had $38.4 million in cash on its balance sheet as of Oct. 29. It reported a $7.9 million net loss for the 13 weeks ended Oct. 29, when it had $539.2 million in total revenue, according to its most recent financial report, dated Nov. 22.

A J. Crew spokeswoman could not be reached for comment today.

For more information, please visit our website:  www.levfininsights.com

Follow us on twitter:  @levfininsights