The Fear of Being J. Crewed Is Once Again Roiling Leveraged Loans

(Bloomberg) — It’s the notification every lender fears: designation of an unrestricted subsidiary.

Most Read from Bloomberg

In plain English, it means that the company that you lent to has just shifted some assets backing your loan — very often among the most valuable assets — into a new unit that’s beyond your reach. And it signals that, in due time, that company will look to strike a deal to borrow more money against those shifted assets from another group of lenders.

The maneuver, famously nicknamed the J. Crew after that retailer used it to get a much-needed lifeline, always has the same effect.

Lenders in the company’s older debt see the value of their loans depleted, with the price plunging deep into distressed levels.

Now, another company could be pulling a J. Crew, Bloomberg’s Reshmi Basu and Rachel Butt reported this week.

Instant Brands, maker of the Instant Pot and Pyrex kitchenware, told lenders in recent days that it started the process of moving one of its properties into a new entity, people familiar with the matter said.

The market value of the company’s roughly $400 million term loan due in 2028, which was already at distressed levels, dropped by about 9 cents on the dollar after the disclosure to 57 cents. And now a group of the lenders are huddling with law firm Ropes & Gray to assess their options.

For Instant Brands’ part, a spokesperson said in an emailed statement that it has taken steps to “ensure the business is well-capitalized to invest for the future.”

The most infamous example of these maneuvers was in 2016, when struggling retailer J. Crew moved its iconic brand and other intellectual property into an unrestricted subsidiary and borrowed $300 million against it. For the lenders stuck holding the company’s old loan, they saw the market value of their debt plunge. The maneuver inspired a new term in the $1.4 trillion leveraged loan market: getting J. Crewed.

One by one, companies from PetSmart, to Travelport to hospital staffing company Envision Healthcare followed a similar play book, and the creditors who watched their collateral slip away saw the value of their loans plunge.

The J. Crew move is a legacy of the easy-money era, when lenders hungry for high-yielding debt turned a blind eye to efforts by companies to chip away debt covenants that otherwise would prohibit such asset-stripping.

Investors did push back in the aftermath of J. Crew, forcing many borrowers to remove the loopholes that allowed asset-stripping. But it didn’t take long for variations to start popping up in loan agreements. And in the market euphoria of the pandemic era, complacency settled in again, allowing companies to remove the most basic lender protections.

In 2021, amid the last big wave of borrowing in the leveraged loan market, more than 90% of new loans were deemed to be covenant-lite, meaning they lacked requirements for borrowers to meet regular financial tests, S&P Global Ratings said in a report that October.

Russian Workaround

Since Russia’s invasion of Ukraine, sanctions intended to punish Vladimir Putin’s regime have crippled the market for Russian bonds sold internationally. Bond payments have become stuck in the payment chain and subject to lengthy due diligence, with trustees often resigning and bondholders left unpaid.

Now some of the nation’s companies, even those that haven’t been directly targeted by recent sanctions, are bypassing the usual channels on Wall Street to repay their outstanding debt.

One company, oil giant Lukoil PJSC — via a special purpose vehicle — went through brokers in Cyprus to buy back all of its outstanding eurobonds, Bloomberg reported this past week, citing people familiar with the matter.

Others, including Uralkali PJSC, MMC Norilsk Nickel PJSC and Metalloinvest Holding Co., have asked bondholders for permission to change bond documentation so they can make direct payments to investors in rubles instead of the currency the debt was issued in, public filings show.

The actions have shrunk Russia’s international bond market, worth $85.6 billion before the invasion, by about $12.7 billion.

Elsewhere:

US retailer Bed Bath & Beyond is staggering toward a bankruptcy filing. The company said it received a default notice from lenders and warned it didn’t have enough funds to make debt payments. Efforts to line up a buyer as it appears headed toward Chapter 11 have also faltered, Bloomberg reported.
Holders of bonds issued by supermarket group Asda are demanding more details about a mooted takeover of EG Group Ltd.’s UK petrol operations, a deal that would saddle the grocer with more debt and could lead to ratings downgrades.
Another defaulted Chinese property developer is making progress toward a debt restructuring. China Fortune Land Development said a UK court has sanctioned its restructuring scheme, which was backed by bondholders owning 98% of its dollar bonds.
On the other hand, Ronshine China Holdings Ltd. added to the list of developer defaults, disclosing more missed note payments.
The recent rally in the leveraged loan market is giving banks a window to unload some of the roughly $40 billion of risky buyout debt they were stuck with during last year’s turmoil, Bloomberg’s Claire Ruckin writes.

–With assistance from Reshmi Basu, Rachel Butt, Irene García Pérez and Dana El Baltaji.