Chinos Holdings, Inc. (J. Crew Group) – Files Prearranged Chapter 11 Plan and Related Disclosure Statement; $1.75bn of Debt Set to be Equitized, “Necessary” Trade Creditor Recovery Capped at 50%

May 18, 2020 – The Debtors filed a "Prearranged" Chapter 11 Plan of Reorganization and related Disclosure Statement [Docket Nos. 247 and 248].

Plan Highlights

• The $311.0mn prepetition ABL Credit Agreement to be repaid in full in cash.
• Holders of $1,337.4mn of prepetition term loans will get 76.5% of the the emerged Debtors' new common shares.
• Holders of $411.7mn of the Debtors' IPCo Notes will get 23.5% of the the emerged Debtors' new common shares.
• Trade creditors "necessary" to the Debtors ongoing operations will split a $50.0mn pool, but will have claims capped at 50%.
• Other unsecured creditors will split $3.0mn if they accept the Plan an $1.0mn if they do not.
•  As of the Petition date, the prearranged Plan had the support of approximately 69.1% of the Term Loans, 77.9% of the IPCo Notes, 66.5% of the Series A Preferred Stock, and 9.8% of the Common Stock.

Plan Overview 

The Disclosure Statement [Docket No. 247] notes, “The Restructuring is expected to materially de-leverage the Debtors’ balance sheet, thereby positioning the Debtors to successfully compete in the retail industry. The Restructuring is also expected to enhance the Debtors’ long-term growth prospects and allow them to focus on operational performance and value creation.

The material terms of the Plan are summarized below: 

• All existing commitments under the ABL Credit Agreement will be terminated and each holder of an Allowed ABL Facility Claim will receive cash in the full amount of its Allowed ABL Facility Claim.
• All existing commitments under the Term Loan Agreement will be terminated, and each holder of an Allowed Term Loan Secured Claim will receive its pro rata share of the common shares of Reorganized Chinos Holdings (the ‘New Common Shares’) representing, in the aggregate, 76.5% of the New Common Shares issued on the Effective Date remaining after distribution on account of the Backstop Premium and the New Equity Allocation, and of any other New Common Shares distributed pursuant to the Plan (other than the New Common Shares distributed to holders of IPCo Notes Claims as described below), subject to dilution from New Common Shares (i) issuable upon exercise of the New Warrants, (ii) issued pursuant to the Management Incentive Plan, and (iii) otherwise issued by the Reorganized Debtors after the Effective Date, including the Incremental Debt Equity.
• The IPCo Notes will be cancelled and each holder of an IPCo Notes Claim (including, for the avoidance of doubt, the New Term Lenders and the Backstop Parties) will receive its pro rata share of New Common Shares representing, in the aggregate, 23.5% of the New Common Shares issued on the Effective Date remaining after distribution on account of the Backstop Premium, the New Equity Allocation, and of any other New Common Shares distributed pursuant to the Plan (other than the New Common Shares distributed to holders of Term Loan Secured Claims as described above), subject to dilution from New Common Shares (i) issuable upon exercise of the New Warrants, (ii) issued pursuant to the Management Incentive Plan, and (iii) otherwise issued by the Reorganized Debtors after the Effective Date, including the Incremental Debt Equity
• Each holder of a general unsecured claims that will provide goods and services necessary to the operation of the Reorganized Debtors, as determined by the Debtors in consultation with the Requisite Consenting Support Parties (the ‘Ongoing Trade Claims’) and that, within 30 days of the Petition Date, has executed a trade agreement that expressly designates such party as a holder of an Ongoing Trade Claim, will on the Effective Date receive its pro rata share of $50 million in cash; provided that the aggregate amount of cash distributed on account of any Ongoing Trade Claim will not exceed 50% of the allowed amount of such Claim.
• Holders of Other General Unsecured Claims, which include rejection damages Claims and the Term Loan Deficiency Claims, 6 will, on the Effective Date, receive their pro rata share of cash allocable to the applicable Debtor from a cash pool that will aggregate (a) $3 million if the class votes to accept the Plan and (b) $1 million if the class votes to reject the Plan; provided, that the aggregate amount of cash distributed on account of any Other General Unsecured Claim will not exceed 50% of the allowed amount of such Claim.
• On the Effective Date, all Existing Holdings Preferred Equity and Existing Holdings Equity shall be cancelled and will be of no further force and effect, regardless of whether surrendered for cancellation.

In addition to supporting the Plan, certain Consenting Support Parties (in such capacity, the ‘DIP Lenders’) have committed to provide the Debtors with debtor-in-possession financing pursuant to a term loan facility in an aggregate principal amount of up to $400,000,000 (the ‘DIP Facility’, and the Debtors’ obligations thereunder, the ‘DIP Obligations’). On May 3, 2020, certain of the Consenting Support Parties (in such capacity, the ‘Backstop Parties’) executed that certain Backstop Commitment Letter (as the same may be amended from time to time, the ‘Backstop Commitment Letter’), committing to backstop the DIP Facility and to provide, if necessary, the Additional New Term Loans.”

The following is a summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; Liquidation Analysis not yet filed)

• Class 1 (“Priority Non-Tax Claim”) (All Debtors) is unimpaired, presumed to accept and not entitled to vote on the Plan. The projected aggregate amount of claims is $[●] and expected recovery is 100%.
• Class 2 (“Other Secured Claims”) (All Debtor) is unimpaired, presumed to accept and not entitled to vote on the Plan. The projected aggregate amount of claims is $[●] and expected recovery is 100%.
• Class 3 (“ABL Facility Claims”) (Only Loan Debtors) is unimpaired, presumed to accept and not entitled to vote on the Plan. The projected aggregate amount of claims is $309,093,952.11 and expected recovery is 100%.
• Class 4 (“Term Loan Secured Claims”) (Only Loan Debtors) is impaired and entitled to vote on the Plan. The projected aggregate amount of claims is $[●] and expected recovery is [●]%. Each holder of an Allowed Term Loan Secured Claim will receive, on the Effective Date, its Pro Rata share of New Common Shares representing, in the aggregate, 76.5% of the New Common Shares issued on the Effective Date remaining after distributing the Backstop Premium, the New Equity Allocation, and any other New Common Shares distributed pursuant to the Plan other than the New Common Shares distributed to holders of IPCo Notes Claims, which will be subject to dilution from New Common Shares (i) issuable upon exercise of the New Warrants, (ii) issued pursuant to the Management Incentive Plan, and (iii) otherwise issued by Reorganized Chinos Holdings after the Effective Date, including the Incremental Debt Equity.
• Class 5 (“IPCo Notes Claims”) (Only IPCO Debtors) is impaired and entitled to vote on the Plan. The projected aggregate amount of claims is $411,668,976.00 and expected recovery is [●]%.  Each holder of an Allowed IPCo Notes Claim will receive, on the Effective Date, its Pro Rata share of New Common Shares representing, in the aggregate, 23.5% of the New Common Shares issued on the Effective Date remaining after distributing the Backstop Premium, the New Equity Allocation, and any other New Common Shares distributed pursuant to the Plan other than the New Common Shares distributed to holders of Term Loan Secured Claims, subject to dilution from New Common Shares (i) issuable upon exercise of the New Warrants, (ii) issued pursuant to the Management Incentive Plan, and (iii) otherwise issued by Reorganized Chinos Holdings after the Effective Date, including the Incremental Debt Equity.
• Class 6-A (“Ongoing Trade Claims”) (All Debtors) is impaired and entitled to vote on the Plan. The projected aggregate amount of claims is $[●] and expected recovery is [●]%. Each holder of an Allowed Ongoing Trade Claim will receive, on the Effective Date, its Pro Rata share of a cash pool in an aggregate amount equal to $50,000,000; provided that the aggregate amount of cash distributed on account of any Allowed Ongoing Trade Claim will not exceed 50% of the Allowed amount of such Claim.
• Class 6-B (“Other General Unsecured Claims”) (All Debtors) is impaired and entitled to vote on the Plan. The projected aggregate amount of claims is $[●] and expected recovery is [●]%. Each holder of an Allowed Other General Unsecured Claim will receive, on the Effective Date, its Pro Rata share of the cash pool allocated to each Debtor as set forth in Section 4.7(b) of the Plan; provided that the aggregate amount of cash distributed on account of any Allowed Other General Unsecured Claim will not exceed 50% of the Allowed amount of such Claim. The cash pool may be reallocated among the Debtors after the occurrence of the Claims bar date, in their reasonable business judgment, to recalibrate for, among other things, the Claims asserted against each Debtor.
• Class 7 (“Intercompany Claims”) (for each Debtor) is unimpaired, presumed to accept, and not entitled to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is N/A.
• Class 8 (“Section 510(b) Claims”) (All Debtors) is impaired, deemed to reject and not entitled to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is 0%.
• Class 9 (“Intercompany Interests”) (All Debtors) is unimpaired, deemed to accept and not entitled to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is 0%.
• Class 10-A (“Existing Holdings Preferred Equity”) (Only Chinos Holdings) is impaired, deemed to reject and not entitle to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is 0%.
• Class 10-B (“Existing Holdings Equity”) (Only Chinos Holdings) is impaired, deemed to reject, and not entitle to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is 0%.

Lease Negotiations and Rejections

The Nicholson Declaration provides: “The Debtors lease all of their retail store locations from approximately 140 landlords and are party to approximately 500 unexpired leases of nonresidential real property, located in nearly every state. Most of the Debtors’ lease agreements have terms typically between five and ten years. The Debtors have approximately $23 million in monthly lease obligations.

Beginning in early April 2020, after several weeks of government mandated store closures and uncertainty as to the duration and resulting impact of the pandemic, the Debtors began to evaluate their lease portfolio to, among other things, quantify and realize the potential for lease savings. In furtherance of the comprehensive lease strategy, the Debtors with the assistance of their real estate advisors, Hilco Real Estate, LLC (‘Hilco’), will begin communicating with landlords in an effort to improve lease terms. If certain accommodations with landlords are not achieved, the Debtors likely will reject certain burdensome leases and close the related stores. Contemporaneously herewith, the Debtors have filed the Lease Rejection Procedures Motion (as described below) seeking authority to implement procedures to reject unexpired nonresidential real property leases and related subleases and the abandonment of certain de minimis property in connection therewith."

Prepetition Indebtedness 

As of the Petition date, the Debtors’ prepetition capital structure includes approximately $2.0bn in funded debt. 

• Prepetition ABL: The Debtors are party to an April 2011 credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A. as administrative agent, collateral agent, lender and issuer, further to which BoA and other lenders have furnished the Debtors with an asset-based revolving credit facility (the “ABL Credit Facility”). As of the Petition date, there was approximately $311.0mn in principal amount outstanding under the ABL Credit Facility and approximately $64.0mn of outstanding but undrawn letters of credit to secure the Debtors’ obligations with respect to their workers’ compensation policies, certain leases, customs bonds, and inventory. The ABL Credit Facility matures on December 4, 2020. 
• Term Loans: The Debtors are party to a March 2014 amended and restated credit agreement (the “Term Loan Agreement”) with Wilmington Savings Fund Society, FSB as administrative agent and collateral agent, and the other lenders from time to time party thereto (collectively, the “Term Lenders”), pursuant to which the Term Lenders agreed to provide the Debtors with a term loan in the initial principal of approximately $1.57 billion (the “Term Loans”). As of the Petition date, approximately $1.34bn in principal amount of Term Loans remain outstanding. The Term Loans will mature on March 5, 2021. 
• IPCo Notes: Pursuant to the terms of a pair of July 13, 2017 indentures (U.S. Bank National Association serving as trustee and collateral agent), Debtors J. Crew Brand, LLC (“Brand”), J. Crew Brand Corp. (“Brand Corp., and together with Brand, the “IPCo Issuers”), the Debtors issued $97.0mn of 13.00% Senior Secured Notes due 2021 (collectively, the “IPCo New Money Notes”) and $250.0mn of 13.00% Senior Secured Notes due 2021 (the “IPCo Exchange Notes”, and together with the IPCo New Money Notes, the “IPCo Notes”).The IPCo Notes mature on September 15, 2021. 

About the Debtors

J.Crew Group, Inc. is an internationally recognized omni-channel retailer of women's, men's and children's apparel, shoes and accessories. As of May 4, 2020, the Company operates 181 J.Crew retail stores, 140 Madewell stores, jcrew.com, jcrewfactory.com, madewell.com and 170 factory stores. Certain product, press release and SEC filing information concerning the Company are available at the Company's website www.jcrew.com.

The Nicholson Declaration adds: "Today, the Debtors are an internationally recognized multi-brand apparel and accessories retailer for young professionals and fashion-conscious men and women. With the J. Crew brand recognized as a household name for nearly four decades, the Debtors enjoy a strong reputation for providing their customers with stylish and quality products. In recent years, the Debtors have also seen fast and innovative growth from their Madewell brand, which offers a full product assortment rooted in premium denim and packaged in a cool, unexpected, and artful aesthetic.

The Debtors operate their retail stores under two distinct brands: (a) the J. Crew brand, which is the Debtors’ primary global brand used for both J. Crew stores and J. Crew factory outlet stores, and (b) the Madewell brand. The Debtors sell their merchandise in stores, online, as well as through partnered wholesalers, such as Nordstrom. The differentiation across the business lines allows the Debtors to operate multiple store locations in close proximity and to serve a wider demographic.

Before implementing a furlough program that began on April 1, 2020 as a result of the COVID-19 pandemic, the Debtors employed approximately 13, 000 individuals in the United States, Canada, the United Kingdom, China, Hong Kong, Vietnam, and India, approximately 4,000 of whom were employed on a full-time basis, and approximately 9,000 of whom were employed on a part-time basis (collectively, the 'Employees'). Due to store closuresin response to the COVID-19 pandemic, the Debtors made the decision to furlough approximately 11,000 Employees on an as-needed basis. As of the Petition Date, the Debtors employ approximately 2,000 active full-time Employees."

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