Exclusive: Blackstone's GSO snaps up J. Crew debt in restructuring gambit

Mon May 1, 2017 2:31pm EDT
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By Jessica DiNapoli

NEW YORK (Reuters) - GSO Capital Partners, private equity firm Blackstone Group LP's (BX.N: Quote) credit arm, is acquiring more of J. Crew Group Inc's debt, hoping for a profitable trade that could also give the U.S. fashion retailer more time to stave off bankruptcy, people familiar with the matter said.

Sales have been declining as J. Crew, whose ballet flats and cashmere cardigans were once a staple of middle-class U.S. wardrobes, struggles to keep abreast of changing tastes and faces fierce competition from cheaper online retailers. It now has $2.1 billion in debt.

Most pressing is $567 million in unsecured bonds coming due in 2019. To cut that burden, J. Crew is trying to slash more than half the bonds' value by placing the intellectual property of its eponymous brand into a new company, but holders of other debt are resisting the move.

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.

Other indebted retailers will be watching the restructuring closely as competition from online rivals like Amazon.com Inc (AMZN.O: Quote) has driven Aeropostale Inc (AROPQ.PK: Quote), Payless ShoeSource and other chains into bankruptcy.

"I imagine a lot of companies that have the ability to do this in their credit agreements are talking to their attorneys and thinking about creative options," Moody's Investors Service analyst Raya Sokolyanska said.

But holders of a $1.53 billion loan to J. Crew, including investment firms Eaton Vance Management and Highland Capital Management LP, have told the company its bond exchange would remove the intellectual property as their collateral, and they would consider that a default, the sources said. Eaton Vance and Highland did not immediately respond to requests for comment.

J. Crew has filed a lawsuit in New York State Supreme Court to prevent them from thwarting the exchange.   Continued...

FILE PHOTO: Models pose during a presentation of the J. Crew Spring/Summer 2017 collection during New York Fashion Week in the Manhattan borough of New York, U.S., September 11, 2016.  REUTERS/Lucas Jackson