Blackstone’s credit arm buys J.Crew debt – restructuring around the corner?

GSO Capital Partners, the private equity firm Blackstone Group LP's (BX.N) credit arm, will be the new owner of most of J. Crew Group Inc's debt. The move is dubbed to be a win-win as will be highly profitable for the investment firm while will keep the fashion retailer off bankruptcy.

People familiar with the matter quoted by Reuters said that both parties hope for this to be a profitable trade that could also give the U.S. fashion retailer more time to stave off bankruptcy.

A significant portion of J. Crew Group’s Inc. two billion dollars debt becomes current in 2018, what has nothing but added even more pressure on the company to try everything to revive its once thriving business.

In April this year, the company announced a staff reduction worth 150 jobs, mainly at its New York headquarters. This strategy is expected to save the clothing label about 30 million dollars a year. But, reported the ‘New York Post’, with the chain having 2 billion dollars in debt, the savings is “a drop in the bucket,” according to Nick Williams, distressed-debt analyst for Reorg Research.

Anchorage will join GSO’s bid on J.Crew 2 billion dollars debt

According to Reuters, a second hedge fund, Anchorage, will be joining GSO in acquiring the fashion brand’s 2.1 billion dollars in debt. Sources with knowledge about the deal pointed out that the investment firms hope to make profit on a bond swap that the company wants to use to get some room to breathe.

J. Crew has said it will then offer to exchange the bonds, which are backed by no collateral, for those from the new company backed by the brand. It will also offer equity to those bondholders, reported the Reuters’ reporter who got the scoop.

The company’s most pressing concern is the 543 million dollars of pay-in-kind notes due in 2019 that become current in 2018. It’s worth recalling that the securities traded at less than 42 cents on the dollar on Dec. 15 last year to yield 51 percent.

But this won’t be an easy operation as a group of holders who include Eaton Vance Management and Highland Capital Management LP and that hold a 1.53 billion dollars loan to J. Crew, have told the company its bond exchange would remove the intellectual property as their collateral, and they would consider that a default, same sources said. Neither Eaton Vance nor Highland have commented on the news as yet.

The company has been struggling in recent years to reconnect with their customers, seeing margins squeeze at a similar pace than its debt raised. Commenting on the company’s Q4FY16 results, chairman and CEO Millard Drexler said that "While the overall retail environment remains challenging, we continue our disciplined management of expenses and inventory and remain focused on delivering the very best, iconic J.Crew and Madewell products our customers love across all channels. As a team, we are taking important steps to drive improved operational excellenceacross the company.

Image:J.Crew Web, No Brainers Collection