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J.Crew Can’t Afford to Keep its Intellectual Property Protected, Say Lenders

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A struggling J.Crew has tried to keep its intellectual property out of lenders’ reach, but things aren’t looking too good for the preppy purveyor.

In February J.Crew filed a lawsuit in the New York State Supreme Court against term loan lender Wilmington Savings Fund Society, saying the lenders were hindering the retailer’s ability to improve the state of its ailing business. In the suit, J.Crew asked the court to place 72 percent of its trademarks, including its brand name, into a separate subsidiary the lenders couldn’t touch.

Now, however, the lenders are arguing that the IP belongs to them as part of the 2011 loan agreement that saw J.Crew acquired by private equity firms TPG Capital LP and Leonard Green & Partners LP, and that J.Crew isn’t entitled to any of the relief sought in the February suit. They also said, considering J.Crew’s current financial position, there aren’t any financial gains to be realized anyway.

Going further, the lenders called J.Crew “insolvent” and said the company’s owners are trying to advance their own efforts over those of J.Crew and creditors.

The company’s latest financials had little positive to pull from.

Announcing its fourth quarter results last week, J.Crew said sales fell 5 percent to $572.6 million, and comparable sales slid 7 percent, compared to a 5 percent decline in the prior year fourth quarter. Revenues were down 2 percent to $695 million. At Madewell, the bright spot in J.Crew’s beleaguered business, sales increased 11 percent to $102.9 million and comparable sales were up 6 percent. For the full fiscal year 2016, sales at J.Crew were down 6 percent to $2.02 billion (Madewell sales were up 14 percent to $341.6 million) and total revenues dipped 3 percent to $2.43 billion.

The company’s total debt has reached more than $1.5 billion.

Moody’s Investors Service downgraded J.Crew on Friday following the news, pointing to its probability of default after the company’s proposed debt exchange.

J.Crew suggested having holders of its HoldCo notes (amounting to $543 million) exchange them into new $200 million 9 percent notes due in 2021.

“Despite providing J. Crew with runway through 2021 to improve operations, the exchange will still leave the company with unsustainable leverage and uncertainty regarding its ability to stabilize earnings and return to growth.” Moody’s analyst Raya Sokolyanska, said. The move—which Moody’s generally views as unsustainable—would likely only see outstanding debt decline by 20 percent, while cash flow would be pressured by $20 million to $50 million in interest payments.

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