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Here’s What’s Holding Up a Madewell IPO

The Madewell concept might be J.Crew Group Inc.’s crown jewel, but the denim-lifestyle brand targeting millennials can’t be spun off into a standalone company until an agreement is reached with lenders over J.Crew’s debt restructuring plan.

“It is still uncertain whether the parties will reach an agreement and on what terms,” credit ratings firm Moody’s Investors Service said Friday.

The plan calls for J. Crew to use proceeds from the sale of a 40 percent stake in Madewell and $500 million in new Madewell debt to repay a large portion of its term loan. J. Crew is currently in talks with holders of $1.9 billion debt that’s due in 2021. Moody’s noted that unless the term loan is “entirely repaid as part of the IPO transaction, the credit agreement requires majority term loan lender consent in order for the IPO  plans to proceed.”

J. Crew is looking to do a cash repayment of the term loan at par, and exchange debt instruments for preferred shares. Lenders instead are seeking to convert existing debt instruments into various payment-in-kind senior secured debt obligations. The debt would be issued by Chinos SPV, a special-purpose vehicle that will hold the remaining 60 percent equity in Madewell after the IPO. The J. Crew intellectual property will be placed in a subsidiary of Chinos SPV.

The Madewell registration statement filed earlier this month with the Securities and Exchange Commission used an illustrative range of $1.9 billion to $2.9 billion for Madewell’s enterprise value. That range is also what the company is using for its lender talks. Moody’s said it is modeling a more conservative range of $1.2 billion to $1.9 billion, mostly because the IPO is heading to market when “retail valuations are broadly under pressure and vary meaningfully,” not to mention the drama surrounding numerous botched IPOs roiling the tech sector.

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Moody’s, in using the more conservative model, is using a 9x to 15x multiple, versus the company’s 15x to 23x multiple of long-term multiple of second quarter 2019 earnings before interest, taxes, depreciation and amortization of $129 million.

While Madewell has continued earnings momentum and high growth via new customer acquisitions, expansion of product assortment and the opening of new stores, Moody’s noted that “its brand recognition is significantly lower than that of selected high growth peers,” such as Lululemon Athletica and Canada Goose.

The ratings firm also said its valuation of Madewell could be impacted by the relatively large initial float, continuing control of the company by J. Crew stakeholders and concern that IPO proceeds will be used to repay J. Crew debt instead of being invested in Madewell.