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Who Will File First? Penney’s, J. Crew and Neiman in Bankruptcy’s Line of Fire

J.Crew, Neiman Marcus and J.C. Penney are caught in the cross-hairs of a global health emergency that’s rapidly becoming a corporate crisis in fashion.

The trio of troubled apparel retailers is peering over the bankruptcy cliff, a hair’s breadth away from following on the heels of the Laura Ashley, Galeria Karstadt Kauhof and Debenhams insolvencies across the pond.

Each fashion chain has earned the dubious distinction of landing on credit ratings firms’ watch lists, owing to their towering mountains of highly distressed debt. And they’re not alone: last month, Moody’s Investors Service warned that wide-reaching store shutdowns could similarly imperil the likes of Ascena Retail Group and Academy Sports + Outdoors, whose ability to refinance their debt and find lenders for debtor-in-possession financing in a bankruptcy proceeding has come under scrutiny.

J. Crew

When the classic American clothier put a planned Madewell IPO on ice in mid-March amid an historic stretch of virus-induced market volatility on top of cascading store closures, the writing was on the wall. At the time, J. Crew said it was pausing the spin-out until the end of April when it would gauge the investor appetite for a new kid on the block.

Given that J. Crew had planned to use proceeds from a Madewell offering to make good on a portion of its $1.7 billion in debt obligations, word that the 37-year-old retailer is considering a  possible Chapter 11 filing this weekend if it can line up DIP financing—as first reported by The Wall Street Journal—comes as little surprise.

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J. C. Penney’s

Penney’s, meanwhile, has been in dialogue with advisors about strategic options, including a potential bankruptcy filing, a source familiar with those discussions told Sourcing Journal—though the retailer has reportedly run into trouble securing DIP financing. The black marks against Penney’s? Its assets aren’t desirable enough to serve as loan collateral and the value of its merchandise, locked away in idle stores and growing more stale and out of season by the day, is challenging to appraise.

Just weeks ago, Penney’s put off a $12 million interest payment, and fashion factors have already stopped approving orders for the mass merchant. There’s a strong correlation between factors washing their hands of a distressed retailer and their bankruptcy hunches proving accurate. Adding to the warning signs: Moody’s downgraded Penney’s corporate credit ratings in April.

Though a bankruptcy filing is among the options on the table, a Penney’s Chapter 11 petition is not inevitable, the source emphasized. However, the company will be in default if it fails to pay the $12 million by May 15—just two weeks away. And that sum looks like child’s play next to a $105 million bond repayment slated for June. Penney’s pays annual interest to the tune of $300 million and carries more than $2 billion in debt that matures in 2023.

Neiman Marcus

The Texas-based luxury department store was expected to file for bankruptcy last weekend, but word from credit sources is that there’s been some dispute among its different constituency groups–lenders and investors–over financing. There has apparently been contention over whether the company should pursue a reorganization or simply put itself up for sale.

Factors told Sourcing Journal earlier this month that Richard Baker, the chairman of Hudson’s Bay Co., is keeping close tabs on the Neiman situation because he has long since wanted to buy the upscale retailer. Baker, who just took Hudson’s Bay private in March in a $1.5 billion deal, also owns Saks Fifth Avenue under the HBC umbrella and the two–Saks and Neiman–are considered separate but distinctly complementary businesses. Baker has made acquisitive overtures in the past, but HBC’s debt level at the time, coupled with Neiman’s, proved too high a hurdle.

While Baker is said to be circling Neiman again, he’s unlikely to make a move until the retailer has entered into bankruptcy—reducing both its potential asking price and debt burden. Whether he can actually finance a deal is a separate matter. Neiman has about $5 billion in debt, and it wasn’t immediately clear what the snapshot of HBC’s balance sheet would look like now that it no longer has public reporting requirements.