(Reuters) – J. Crew Group Inc filed for bankruptcy protection on Monday with a plan to hand over control to lenders, adding to a list of brick-and-mortar retailers pushed to the brink by widespread store closures in response to the COVID-19 pandemic.
The New York-based chain, known for preppy clothing at times worn by former first lady Michelle Obama, filed for bankruptcy in a Virginia federal court with an agreement to eliminate $1.65 billion of debt in exchange for ceding ownership to lenders. Overall, roughly $2 billion of its total debt will be cancelled and exchanged for roughly 82% of equity in the retailer under the plan’s terms, according to court records.
J. Crew, which employed about 13,000 people before an April furlough program, is the first high-profile retailer to seek bankruptcy protection since the coronavirus spread across the globe, prompting government officials to order businesses deemed nonessential to temporarily close.
It is likely not the last. Department store chains Neiman Marcus Group and J.C. Penney Co Inc (JCP.N) are contemplating bankruptcy filings amid the crisis, Reuters previously reported.
Anchorage Capital Group, Blackstone Group Inc’s (BX.N) GSO Capital Partners and Davidson Kempner Capital Management hold significant portions of J. Crew’s senior debt and are in line to take control of the company.
They are also providing about $400 million of fresh financing to aid J. Crew’s operations while it navigates Chapter 11 bankruptcy proceedings, the company said. J. Crew is expected to emerge from bankruptcy in September under its agreement with lenders.
In addition to cancelling debt, J. Crew plans to permanently close some stores, though the final number it plans to shutter has not yet been determined, according to court records and a person familiar with the matter.
The virus outbreak forced the company to temporarily close its nearly 500 J. Crew, J. Crew Factory outlet and Madewell stores, leading to nearly $900 million in lost sales, according to court records. In addition, the economic fallout and market turmoil stemming from the public health crisis resulted in the company shelving plans for an initial public offering of its Madewell business.
Madewell will remain part of J.Crew Group and Libby Wadle will continue in her role as its chief executive officer, the company added.
J. Crew had hoped to take proceeds from the IPO to reduce its debt rather than use bankruptcy to address its strained finances, but the pandemic derailed those plans, according to court records.
J. Crew opened its first store in downtown Manhattan in 1989 and expanded across the United States and overseas, eventually going public on the New York Stock Exchange in 2006 and becoming a household name.
J. Crew was taken private in 2011 by TPG and Leonard Green & Partners in a roughly $3 billion leveraged buyout, and their investments will now be wiped out, according to court records.
Before the pandemic, J. Crew was already struggling along with other traditional brick-and-mortar retailers to compete amid a consumer shift to online shopping.
It also suffered after a strategic misstep of raising prices that turned off some shoppers. Talks in 2014 to sell J. Crew to Japan’s Fast Retailing Co (9983.T), the owner of the Uniqlo apparel chain, fell apart.
The retailer had avoided bankruptcy in 2017 in a deal with creditors that reduced total debt and pushed out due dates on obligations.
But its struggles continued. Millard “Mickey” S. Drexler, a longtime leader of the chain known for his fashion acumen who also at one point helmed Gap Inc (GPS.N), conceded he misjudged how technological developments would alter the retail landscape.
He stepped aside as J. Crew’s chief executive officer in 2017, and last year relinquished his seat as board chairman.
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