Chinos Holdings, Inc. (J. Crew Group) – Court Confirms Plan in One-Day Hearing; Debtors Expect to Emerge in Early September Minus $1.6bn of Prepetition Debt

August 25, 2020 – The Court hearing the Chinos Holdings, Inc. (J. Crew Group) cases has confirmed the Debtors' Second Amended Plan. The Court has yet to issue a confirmation order but a reference to Plan confirmation is filed at Docket No. 872 and a revised proposed Plan confirmation order was filed by the Debtors on August 25th [Docket No. 865].

In a press release, announcing the Plan's confirmation, the Debtors noted: "the Company expects to emerge from Chapter 11 in early September, after it has satisfied the customary conditions to the effectiveness of the Plan.

The Plan, which has widespread support across the Company's stakeholders, will equitize over $1.6 billion of secured indebtedness, and provide a $400 million exit ABL facility and $400 million of new term loans."

Critical to the Plan's apparently smooth, one-day, Plan confirmation hearing was the settlement reached between the Debtors and their Official Committee of Unsecured Creditors (the "Committee" and the “GUC Settlement,” respectively) whereby the Committee agreed to withdraw its objection to the Plan in exchange for a recovery doubled, from $3.0mn to $6.0mn, for members of Class 6-B ("Other General Unsecured Claims"). This recovery pool is to be administered pursuant to a trust (the "6-B GUC Trust") on behalf of those trade creditors with whom the Debtors do not intend to continue relationships (at least until they do again). Creditors in Class 6-A (“Ongoing Trade Claims”) will split a pool of $71.0mn with individual recoveries limited to 50% of the allowed amount of any claim. We covered this story separately.

On May 3, 2020, Chinos Holdings, Inc. and one affiliated Debtors (“J.Crew Group” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Virginia, lead case number 20-10343. At filing, the Debtors, an omni-channel retailer of women's, men's and children's apparel, shoes and accessories, noted  estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $10.0bn and $10.0bn. In its most recent 10-Q, the Debtors listed assets of $1.76bn and liabilities of $3.11bn (long-term debt at $1.66bn). 

Plan Overview

The Amended Disclosure Statement [Docket No. 707; Please note a Disclosure Statement Supplement, detailing the impact of the GUC Settlement, was filed at Docket No. 860] notes, “As of the date hereof, Consenting Support Parties and Sponsors holding approximately 96% of the Term Loans, 100% of the IPCo Notes, 85% of Series A Preferred Stock, and 89% of the Common Stock are party to the Transaction Support Agreement. Under the terms of the Transaction Support Agreement, the Consenting Support Parties, the Sponsors, and the Debtors agreed to the series of transactions set forth in the Plan and described herein (the ‘Restructuring’). 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:

• Each holder of an Allowed ABL Facility Claim will receive cash in the full amount of its Allowed ABL Facility Claim.
• Each holder of an Allowed Term Loan Secured Claim will receive its pro rata share of the common equity of Reorganized Chinos Holdings (the ‘New Common Equity’) representing, in the aggregate, 76.5% of the New Common Equity 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 Equity distributed pursuant to the Plan (other than the New Common Equity distributed to holders of IPCo Notes Claims as described below), subject to dilution from New Common Equity (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 an Allowed IPCo Notes Claim will receive its pro rata share of New Common Equity representing, in the aggregate, 23.5% of the New Common Equity issued on the Effective Date remaining after distribution on account of the Backstop Premium, the New Equity Allocation, and of any other New Common Equity distributed pursuant to the Plan (other than the New Common Equity distributed to holders of Term Loan Secured Claims as described above), subject to dilution from New Common Equity (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 Parties4 (the ‘Ongoing Trade Claims’) and that has executed a trade agreement that expressly designates such party as a holder of an Ongoing Trade Claim,5 will on the Effective Date receive its pro rata share of $71 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.
• [This preceeds GUC Settlement] 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 [the following no longer applicable, with $3.0mn raised to $6.0mn and that amount no longer based on favorable Plan vote] $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 an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement, changes in bold):

• 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 $ $250,000 and expected recovery is 100%.
• Class 2 (“Other Secured Claims”) (All Debtors) is unimpaired, presumed to accept and not entitled to vote on the Plan. The projected aggregate amount of claims is Non-Material and Undetermined 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 plus $63,960,717 of letter of credit obligations 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 $716,645,605 and expected recovery is 100%. Each holder of an Allowed Term Loan Secured Claim will receive, on the Effective Date, its Pro Rata share of New Common Equity representing, in the aggregate, 76.5% of the New Common Equity issued on the Effective Date remaining after distributing the Backstop Premium, the New Equity Allocation, and any other New Common Equity distributed pursuant to the Plan other than the New Common Equity distributed to holders of IPCo Notes Claims, which will be subject to dilution from New Common Equity (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 and expected recovery is 53.4%.  Each holder of an Allowed IPCo Notes Claim will receive, on the Effective Date, its Pro Rata share of New Common Equity representing, in the aggregate, 23.5% of the New Common Equity issued on the Effective Date remaining after distributing the Backstop Premium, the New Equity Allocation, and any other New Common Equity distributed pursuant to the Plan other than the New Common Equity distributed to holders of Term Loan Secured Claims, subject to dilution from New Common Equity (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 $134,934,228 and expected recovery is 50%. Each holder of an Allowed Ongoing Trade Claim will receive, on the Effective Date, (i) the Preference Claim Waiver and (ii) its Pro Rata share of a cash pool in an aggregate amount equal to $71.0mn 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. Each holder of an Allowed Other General Unsecured Claim that is a Class 6-B GUC Trust Beneficiary will receive, on the Effective Date, (i) the Preference Claim Waiver and (ii) a Pro Rata share of the Class 6-B GUC Trust Net Assets; 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 Class 6-B GUC Trust Net Assets will be used to satisfy Allowed Other General Unsecured Claims of each Debtor in accordance with the allocation set forth below, provided that the Class 6-B GUC Trustee may reallocate the Class 6-B GUC Trust Net Assets after the occurrence of the Claims bar date, in its reasonable business judgement, 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 entitled 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 entitled to vote on the Plan. The projected aggregate amount of claims is N/A and expected recovery is 0%.

Voting Results

On August 24, 2020, the Debtors’ claims agent notified the Court of the Plan voting results, which were as follows [Docket No. 853]:

• Class 4 (“Term Loan Secured Claims”) 90 claim holders, representing $643,450,622.69 in amount and 100% in number, accepted the Plan.
• Class 5 (“IPCo Notes Claims”) 49 claim holders, representing $341,000,747.00 in amount and 100% in number, accepted the Plan.
• Class 6A (“Ongoing Trade Claims”) 28 claim holders, representing $69,859,780.85 in amount and 100% in number, accepted the Plan.
• Class 6B (“Other General Unsecured Claims”) 89 claim holders, representing $557,077,962.91 (or 95.11%) in amount and 97.80% in number, accepted the Plan. 2 claims holders, representing $28,642,331.44 (or 4.89%) in amount and 2.20% in number, rejected the Plan.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Nicholson Declaration”), Michael J. Nicholson, the Debtors’ President and Chief Operating Officer the detailed the events leading to the Debtors' Chapter 11 filing. The Nicholson Declaration provides: "Although the Debtors’ business enterprise is operationally sound, the Debtors have substantial long-term funded debt and lease obligations that they must restructure. In addition, in recent weeks, the Debtors have been heavily impacted, like many of their retail peers, by the unprecedented and evolving global pandemic, COVID-19. Through these chapter 11 cases, the Debtors will have the opportunity to address their substantial indebtedness and lease obligations while allowing the Debtors to raise additional capital to fund their operations and make strategic investments to allow them to emerge as a stronger global enterprise.

The specialty retail industry is highly competitive and, in recent years, the retail industry as a whole has been challenged by shifts in consumer purchasing preferences and habits. The Debtors primarily compete with specialty retailers, department stores, and e-commerce businesses that engage in the sale of women’s, men’s and children’s apparel, accessories, and similar merchandise. The Debtors are not in the business of 'fast fashion' and pride themselves on long-lasting merchandise, quality designs, and attentive customer service. Nevertheless, the Debtors face increasing competition from 'fast fashion' retailers due to their aggressive pricing strategies.

Moreover, economic conditions around the world have impacted the Debtors’ customers and affected the general business environment in which the Debtors operate and compete. Because apparel and accessories generally are discretionary purchases, consumer purchases of the Debtors’ products have declined when consumer disposable income is lower. As a result, the Debtors’ sales, growth, and profitability have been adversely affected by unfavorable economic conditions across the United States and abroad. In addition, unfavorable economic conditions abroad have impacted the Debtors’ ability to meet production goals. As noted previously, approximately 87% of the Debtors’ merchandise is sourced in Asia, with approximately 45% of the Debtors’ products sourced from mainland China and 12% sourced from Europe and other regions. Each of those regions have been particularly affected by COVID-19 and have faced significant prolonged shutdowns, which has affected the Debtors’ ability to obtain supplies and finished goods from those areas. Although the Debtors believe their quality, design, customer service, and price remain a compelling proposition over the long term, the Debtors have not been immunized from these broader trends, particularly in light of COVID-19.

Over the past several years, the Debtors’ significant funded debt, as set forth above, and the attendant debt service obligations, have restricted the Debtors’ liquidity and growth.For example, the Debtors paid approximately $143 million in fiscal year 2019 for cash interest expense alone. The debt service obligations impacted the Debtors’ ability to make capital expenditures, including to refresh store locations, drive growth initiatives, and further enhance their customer experience. The Debtors also have substantial fixed contractual commitments,including, as noted above, $23 million of monthly lease obligations.

COVID-19

The Nicholson Declaration provides: "In late February 2020, the Debtors began to face unprecedented liquidity and operational challenges with the spread of COVID-19. Though many companies across all industries faced hardships and tumultuous market conditions, the Debtors were uniquely and severely impacted as a customer-facing retailer in an already struggling industry. The Debtors quickly encountered, among other things, (a) a steep decrease in net sales across their business lines and (b) inability of the Debtors’ foreign vendors to operate, produce, and ship merchandise. By early March 2020, the Debtors were forced to close all retail stores consistent with governmental health guidelines and directives. The Debtors have been relying primarily on e-commerce activities. As noted, the Debtors expect a loss of almost $900 million in sales due primarily to store closures across all brands. As a result of the foregoing, the Debtors have experienced a steep drop in revenue, which forced the Debtors to employ liquidity preservation measures.

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. 

Prepetition Equity Holdings

• TPG Capital, L.P.:  55% of the Debtors’ common stock (the “Common Stock”) and approximately 66.2% of Holding’s 7% non-convertible perpetual series B preferred stock (the “Series B Preferred Stock”).
• Leonard Green & Partners LP:  20.7% of the Common Stock and approximately 24.8% percent of the Series B Preferred Stock.
• Anchorage Capital Group, L.L.C.: 25.6% of 7% non-convertible perpetual series A preferred stock (the “Series A Preferred Stock”).
• GSO Capital Partners LP: 26.1% percent of Series A Preferred Stock.
• Goldman Sachs & Co. LLC: owns approximately 15.5% of Series A Preferred Stock.

Liquidation Analysis (please see Exhibit C to Disclosure Statement [Docket No. 469] for notes and further detail as to “low and high scenarios”)

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."

Corporate Structure Chart

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