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Minority Lenders File Suit Aiming to Block J.Crew Restructuring Plan

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Just days after J.Crew Group Inc. said it had received consents to its term loan amendment announced earlier this month from lenders representing more than 80 percent of the term loan that would seem to pull it out of a debt predicament, two lenders filed a lawsuit in New York State Supreme Court in an attempt to block it.

Lenders Eaton Vance Management and Highland Capital Management LP are asking the court to block a restructuring transaction they say would move the retailer’s intellectual property, including its brands, beyond their reach.

The suit claims that J.Crew intends to “wrongfully impose their losses onto the backs of their secured lenders” and that in executing the restructuring deal, J.Crew, which the plaintiffs said is “insolvent,” “received and will receive nothing of value in exchange for the transfer of its intellectual property.”

“Accordingly, plaintiffs and other term lenders are entitled to have all of the value transfers,” they said in court papers.

The exchange offer to bondholders and update to its term loan is aimed at ending its legal battle with lenders and pushing its next loan maturity by two years to 2021.

The term loan amendment was announced in connection with an offer to exchange any or all of the outstanding $566.5 million aggregate principal amount of senior notes due 2019.

J.Crew is said to have placed its intellectual property in a new subsidiary that will issue $250 million in new debt, which will be used to buy back existing bonds.

(Read more about how debt is dooming retailHow a Lack of Liquidity is Tanking Retail—And Who’s to Blame)

As part of the new deal, the majority of lenders agreed to immediately stay all litigation activities regarding the company’s intellectual property transactions that occurred in December, and withdraw and dismiss all pending litigation, including any claims that were or could have been asserted between the company and the term loan agent.

J.Crew said it views these transactions as strategically important to its overall effort in positioning the company for long-term success. Addressing the nearest-term maturity removes an overhang in a challenging market environment and provides the company a clear and more confident path to execute its business plan, the retailer added.

The embattled retailer, which is fighting to stay out of bankruptcy, crafted the deal to push back its most pressing debt obligation—a $500 million bond maturity in May 2019—and to buy itself more time to turn around its business. The holdouts said the deal breaches the terms of their loan agreement for the benefit of J.Crew’s shareholders.

Under the proposed deleveraging deal, bondholders would exchange their claims at a discount for equity and new longer-term debt backed by a claim on J.Crew’s intellectual property, such as its brand name. Higher-ranking lenders were required to sign off on the transaction and accept the company’s right to pledge the brands as collateral for the new bonds.

A J.Crew spokeswoman did not immediately respond to a request for comment.

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