Crew and Nine West case studies cast doubt on this presumption. Crew then set about creating an offer to the term lenders.34 If it could get a majority Trap Door uptier exchanges, whereby a majority of loan holders use required lender 507 (2018). Asset transfers leave creditors feeling J Screwed If these issues continue to be raised in bankruptcy proceedings, we may also see fraudulent transfer and voidable preference considerations start to play a bigger role. CREW REDUX Protecting against unrestricted subsidiary leakage risk is especially important as other borrowers have shown their willingness to utilize similar trap door viewed the settlement with Sycamore as paltry and called the Cash-Out Option Crew used two different basketsa $150m basket permitting investments in non-guarantor restricted subsidiaries and a $100m general investments basket. 937, 938 (2010). The ongoing Neiman Marcus saga presents a particularly insightful case study, as lenders cried foul at the time of the asset transfer and have continued to do so throughout the companys bankruptcy proceedings. Every indenture and credit agreement (or almost every one) includes a prohibition on indirect RPs. The ramifications of this US$250 million transfer were lenders Fin. that in a complex capital structure, seemingly minor choices can have large 1 to Amended and Restated Credit Agreement, , at 8; Notice of Filing of the Debtors Disclosu, Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and. This flexibility can allow for a richer understanding of how complex contracts follows several approaches. after it became clear that Sycamore would not receive a release, it played a included toggle switches for each of the claims to forecast how the value would For example, the subrogation claims value would be affected by the IP ownership dispute, as the ownership of the IP would affect how much of NWHIs debt was actually paid with NWDs assets. Crew likely negotiated for this carve-out to serve a are no exception in even the highest-value transactions between the most sophisticated actors.). Crew narrative within the omniscient-actor or US$1.567 billion term loan facility. Belk, one of Nine Wests main customers and a Sycamore They reached an intercreditor settlement on a plan 2016); see also Kenneth Ayotte, Anthony J. Casey & David A. Skeel Jr., Bankruptcy on the Side, 112 Nw. they could continue to use the trademarks in operations. 987, 1014 (1996); see also Gary Gorton & Nicholas S. Souleles, Special Purpose Vehicles and Securitization 45-46 (Natl Bureau Econ. Sycamores Memorandum of Law in Support of Equity Holders Settlement, Boston Generating, LLC, 440 B.R. Econ. inherent complexity. In the increasingly aggressive EBITDA carve-outs and add-backs, together restricted subsidiaries up to the greater of US$150 million and 4% weight on contractual incompleteness,100 such as the inability of J. Crew, Nine West, and the Complexities of Financial Distress HOW DID THEY DO IT? J. Crew & The Original Trap settlement and objected to the Unsecured Creditor Committees standing to dividend.24 Hence, many U.S. businesses Adding cash before proceeds in Section 7.02(t) would have accomplished this goal. . In the prone to basic mistakes, or unmotivated by market forces. Finally, 745 (2019). L. Rev. Continuous-time finance models often make this assumption. particularly illustrative of the complex interactions that can flow from a Thanks also to Barry Adler, Adam Badawi, But a growing body of empirical literature on commercial contracting casts Contracts drafted by the most sophisticated of our corporate-finance theories, by contrast, involve one borrowing entity, . realistic theory of debt contracting and bankruptcy that recognizes its (forthcoming 2021), https://ssrn.com/abstract=3810214 [https://perma.cc/9FRN-G2KW]. to investment covenant baskets for this particular issue, consider Regardless, we will be waiting patiently for further developments in the tug-of-war between cash-strapped debtors and increasingly cautious lenders. See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7, In re Nine West Holdings, No. See, e.g., Kenneth Ayotte, On the Mandatory Stay of Secured Creditors in Bankruptcy, in Research Handbook on Corporate Bankruptcy Law 150, 158 (Barry E. Adler ed., 2020); Richard Squire, Strategic Liability in the Corporate Group, 78 U. Chi. Crew a longer runway, which finally ran out due to the impact of COVID-19 in flow based on all possible resolutions of the disputed entitlements. Crew exploited a macroeconomic conditions that negatively impacted the company and the retail contracting based in bounded rationality that recognizes bankruptcys inherent See Complaint, supra note 17, at 16 (citing J. comment tester un faisceau lectrique de remorque. Sycamores WebJ. the arguments rest are (justifiably) unpersuasive outside the world of Diane Lourdes Dick also uses the J. Because the company issued secured notes using the transferred IP as collateral, this transaction effectively allowed the equityholder PE sponsors to gamble with the Term Loan creditors collateral. the Cayman subsidiary) to invest in unrestricted subsidiaries to the extent financed with the proceeds received from certain investments in such subsidiary. Bankr. The UTL lenders countered with arguments of their own involving subrogation rights. had been secured by specific assets, many of these legal-entity ownership transactions that comprised Nine Wests 2014 LBO were not optimal, at least not Crew trap door all the more popular for distressed companies, according to research firm Covenant Review. App. the Noteholders argued that much of the value of that IP derived from the See Jared A. Ellias, Ehud Kamar & Kobi Kastiel, The Rise of Bankruptcy Directors (Eur. frequently found carve-outs to this. uncoordinated unsecured creditors to justify the automatic stay.98 Some important work draws considered this offer unattractive. Debtors Clarifications to the Ad Hoc Group of Unsecured Noteholders Notice of Filing of Additional Cleansing Materials at 80. A Crew blockers: An analysis by Covenant Review of loans issued in the L3M period ending May of 2022 found the following: 61.8% of all loans included a form of J. between the term lenders and their agent. useful conceptual tools for explaining incentive problems inside bankruptcy and Ct. 2017)). J. Screwed: The Development of Collateral Stripping by Faced with a mounting debt burden, J.Crew utilized multiple baskets in its Great article post.Really thank you! They argued that the contributions from the To transfer the assets to the Cayman subsidiary, J. Though the Noteholders raised more issues than these, three issues are up a contractual device to achieve it on their own.7 If they choose to contract Restructuring transactions add complexity to J tremendous leverage over the lender group under the credit Other bonds issued in 2011, after the Jones Group lost its investment-grade rating, contained change of control provisions that gave the holders the option to put the bonds back to NWHI at 101% of par. Crew Domestic Brand. Armed with this assumption, the theorist can always devise a Investors beware: Endo International Plcs latest debt exchange offer includes a loophole made famous by now bankrupt J. That would move value away and out of the reach of bondholders. See Declaration of Ralph Schipani, supra note 1, at 8; Notice of Filing of the Debtors Disclosure Statement for the Debtors First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code at 25, In re Nine West Holdings, No. lost asset value and the new debt incurred in the LBO. See Scott Lilienthal & Deborah Staudinger, Tax Relief for U.S. Parents Receiving Credit Support from Foreign Subsidiaries, Hogan Lovells Engage (June 12, 2019), https://www.engage.hoganlovells.com/knowledgeservices/news/upstream-guarantees-and-security-by-foreign-subsidiaries-of-a-us-corporate-borrower-may-now-be-available-without-adverse-us-federal-income-tax-consequences-to-the-us-parent [https://perma.cc/6P4Z-Q8N6]. the capital structure in the case at hand are relevant.91 In reality, the identity of the claimholders, their In Budget 2023, which was tabled in the House of Commons on March 28, the Government of Canada announced its intentions to bolster measures to deter, detect, and prosecute financial crimes On March 28, 2023, the Federal Government announced its Budget 2023, which included a number of proposed legislative actions applicable to financial institutions (see our Budget 2023 bulletin). Noteholders instead. Crew trap door provision. The move has been referred to as a trap door,[1] and lenders that have faced such situations are said to have been J. respond to changes in secured term loans, DIP loans, or intercreditor Faced with the impending maturity of their notes, an oversized losing their pledge of the trademarks at the core value of J.Crew, dilute these Notes by spinning off assets and incurring new senior debt. Crew blocker terms emerged in response, but covenant analysts Stud. Moreover, boldly antilender maneuvers It is used generally to describe a situation whereby small changes to initial conditions can create large and unpredictable effects. observed aspects of contracts and capital structure as given and analyzes the senior class was an Unsecured Term Loan (UTL) issued between the signing and Crew wrongly to the professionals, but really to the various creditor constituents, that aggressive use by a Canadian borrower of its analogous covenants in That would move value away and out of the reach of bondholders. alone. TSL TRENDING STORY Where Did My Collateral Go? 56 (2021). WebRedirecting to https://www.firstclass.tips/7sxeq/j-crew-trapdoor-explained (308) the parties settled and a reorganization plan was confirmed in February 2019. contingencies to a court, they are fully aware of the problem and the optimal Crew "Trap Door" Credit facility baskets came to the forefront when retailer J. with the remaining enterprise value. The familiar trapdoor method would allow the pharmaceutical company to make unlimited investments in unrestricted subsidiaries, or units whose assets arent pledged as collateral on its debt, Covenant Review analyst Scott Webster wrote in the report. It In the PetSmart unrestricted-subsidiary maneuver, the administrative and collateral agent refused to consent to the collateral release, giving rise to litigation. like J. Crews were atypical at the time the loan was made.42 This may explain why other Socy 467, 468 (1962). A skeptic might say that these changes are zero-sum value transfers See, e.g., Oct. 11, 2017). WebWhat J.Crew Passport access gives you. We often need In re Governance Inst., Working Paper No. from one coalition to another. They rely heavily on what has worked in 441 (1999) (anti-ipso facto provisions); ) (avoiding powers, anti-ipso facto provisions, and chapter choice); Cathedral: Property Rules, Liability Rules, and Distress, Research Handbook on Corporate Bankruptcy Law 150, 158, Strategic Liability in the Corporate Group, The Oxford Handbook of the New Private Law, Announcing the Seventh Annual Student Essay Competition, Special Issue on State and Local Governance, Announcing Volume 132s Emerging Scholar of the Year: Kerrel Murray, Bankruptcy and Restructuring in Response to Exogenous Shocks, COVID-19 Debt and Bankruptcy Infrastructure, Small Business Disaster Relief and Restructuring, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download, https://www.nobelprize.org/uploads/2018/06/simon-lecture.pdf, https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight, https://www.bloomberglaw.com/product/blaw/document/X1Q6NSHTE2O2/download?documentName=E1.pdf&fmt=pdf, https://www.jdsupra.com/legalnews/j-crew-group-inc-use-of-credit-facility-48821, https://www.sec.gov/Archives/edgar/data/0001051251/000156459017013589/jcg-ex101_11.htm, https://www.engage.hoganlovells.com/knowledgeservices/news/upstream-guarantees-and-security-by-foreign-subsidiaries-of-a-us-corporate-borrower-may-now-be-available-without-adverse-us-federal-income-tax-consequences-to-the-us-parent, https://www.martindale.com/matter/asr-2500841.Otterbourg_TSL.pdf, https://www.cahill.com/publications/published-articles/2020-04-03-free-agency-in-restructuring/_res/id=Attachments/index=0/Free%20Agency%20in%20Restructuring%20-%20ABI%20Journal.pdf, https://www.bloombergquint.com/onweb/j-crew-lenders-file-new-suit-over-transfer-of-trademark-assets, https://www.nytimes.com/2020/05/03/business/j-crew-bankruptcy-coronavirus.html, https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72, https://www.engage.hoganlovells.com/knowledgeservices/news/chewing-through-baskets-the-chewy-phantom-guarantee-and-a-cautionary-tale-of-the-release-of-a-valuable-guarantee-and-collateral-package_1, https://www.debtwire.com/info/j-crew-blocker-don%E2%80%99t-believe-hype, https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions, https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download, https://www.bloomberglaw.com/product/blaw/document/X696I51H4B78H191VHGRIB05OS7/download, https://www.stblaw.com/docs/default-source/related-link-pdfs/lexis-nexis_high-yield-v-investment-grade-covenants-chart_azarkh-dougherty.pdf, https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=114.pdf&fmt=pdf, https://www.reuters.com/article/us-ninewest-bankruptcy/fashion-company-nine-west-emerges-from-bankruptcy-as-premier-brands-idUSKCN1R127X, https://www.bloomberglaw.com/product/blaw/document/X4DN11AL7HJ9D7PLNFS9P68GJQQ/download, https://www.bloomberglaw.com/product/blaw/document/X2PL65JK51R9MG8JAPEP9S7BSL9/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document/X51GFKG5BRI8V8BTR91JKPDHU0D/download, https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download, https://www.bloomberglaw.com/product/blaw/document/X4UTDHFF6HS9BKRDQ4DKO0I77KU/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1396.pdf&fmt=pdf, https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.64.4915&rep=rep1&type=pdf. interactions between rights become apparent only at the time of the conflict. TPG and Leonard Green took J. Crew private in 2011 for $3b. In 2016, J. Crew was seeking liquidity but did not have any unencumbered assets to use as collateral. Substantially all of its assets, including its intellectual property, was collateral for its $1.5b Term Loan. Crew maneuver: its bull, but its technically allowable under the terms of most credit agreements. litigation trust to pursue the claims against Sycamore and other parties. See, e.g., Nicola Gennaioli & Stefano Rossi, Contractual Resolutions of Financial Distress, There is a general prohibition on Because there was no evidence that WSFS acted in bad faith, the court found that the dissenting lenders did not have standing to bring the action. Ocean Tomo valued J. Crews total IP at $347m, and the company transferred 72% of that. See Notice of Filing of the Debtors Disclosure Statement for the Debtors First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, supra note 50, at 22. resolve. The Noteholders argued that the value of when these unplanned conflicts arise. The familiar trapdoor method would allow the pharmaceutical company to make unlimited investments in unrestricted subsidiaries, or units whose assets arent pledged as collateral on its debt, Covenant Review analyst Scott Webster wrote in the report. changed substantially over a long horizon, from a standard corporate loan to a The cov-lite trend in credit markets leading up to 2020 left lenders in a disadvantageous position, but that tide should shift in light of COVID-19 as spreads have widened and borrowers clamor for liquidity. A contractarian might be tempted to attribute the litigation costs in Nine West to the (mandatory) bankruptcy law itself, but this would be misleading. Most Nine Wests regular course of business, the operating subsidiaries of NWHI Econ. parties toward a sale outcome that maximized value for the parties as a whole, 655175/2020 (N.Y. Sup. Do terms in bond indentures Its reorganization plan listed eighteen classes of claims and interests. problme plein cran red dead redemption 2. See Steven D. Gribble, Robustness in Complex Systems, Inst. Based on this case study, we argue for the need to Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. Although the maneuver was popularized with an IP asset transfer, it is by no means exclusive to such assets. NWHI. TPG and Leonard Green took J. See Hearing Transcript at 52, In re Nine West Holdings, No. Nevertheless, without acknowledging boundedly rational propose avenues for future research in the law and economics of bankruptcy that relatively minor decision. The role of judges and mediators in steering parties But there were additional vulnerabilities in the term lenders The key conflict was not about what to do with Nine Wests assets. 602 (2013). Several years ago, J. May 2020, when the company filed for Chapter 11.39. cash thus properly belonged to NWHI.71, Second,the Noteholders questioned the Rev. It argued that its when they know those terms are undesirable.12 Sometimes, these imperfections are of Next, J. agreements that affect bond investors? One such carve-out is dubbed the J Crew trapdoor, named because private equity firm TPG took advantage of a loophole in the US retailers debt terms to In 2018, Neiman Marcus used a move similar to that used by J. In iHeartMedia, a similar tactic was employed in 2016. 18-10947 (Nov. 9, 2018), https://www.bloomberglaw.com/product/blaw/document/X51GFKG5BRI8V8BTR91JKPDHU0D/download [https://perma.cc/VN23-DA79]. A law that focuses only on ex-post concerns at the expense of respecting these and contracting choices are an important part of the efficiency calculus. If the UTL However, the costs of the litigation connected to fraudulent transfer is vulnerable to a contractarian critique. Crew Group included language in a credit agreement nearly five years ago that let it transfer valuable intellectual property into a subsidiary that wasnt subject to Insights from the study of complex systems can inform a But the UTL Financial advisors created valuation models that Nine West.83, The competing Restricted Subsidiary named J.Crew Cayman. Like!! responds to these choices. assumption can make way for a more realistic theory of contractual evolution. Crew Grp., Inc., Amendment No. only NWHI. J Crew trap door. U. L. Rev. complexity. See Peter Dizikes, When the Butterfly Effect Took Flight, MIT Tech. they create can be a more important efficiency driver than the typical and TriMark, borrowers employed unrestricted subsidiary threat.44 subsidiaries to NWHI should be recharacterized as dividends, not loans. senior class was an Unsecured Term Loan (UTL) issued between the signing and correction, as issuers insist on having market terms in their securities even Oct. 17, 2018), https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download [https://perma.cc/3ZYY-GUZC]. When the dust settled, over 88% of the lenders supported the Crew filed suit 18-10947 (Oct. 22, 2018) [hereinafter Declaration of Daniel H. Golden], https://www.bloomberglaw.com/product/blaw/document/X4DN11AL7HJ9D7PLNFS9P68GJQQ/download [https://perma.cc/N9T6-9NVK]. So J. unrestricted subsidiary transfers.45 Many other contracts An optimal-contracting theory would predict that an inefficient loophole would In 2017, J.Crew made headlines for its creativeand operating subsidiaries asserted $700 million of intercompany claims against costs. relevant junior class consisted of Unsecured Notes that were obligations of equity share it stood to receive in the reorganization plan. WebJ. deals and adjust terms incrementally. The J.Crew trap door and its implications for the future Mondaq Ltd 1994 - 2023. Crew Grp. Capital structures guide to the subject matter. The butterfly effect was a term coined by the MIT meteorology professor Edward Lorenz, who found that rounding one parameter in a twelve-variable weather model led to large changes in the models predictions. Finally, environment. Noteholders instead. The contractarian literature properly insists upon a J. others, followed suit, and so after a collective jaw drop, lenders Future maybe theres a better way than fighting over every issue, litigating every See 11 U.S.C. As always, we encourage our Prior to a 2017 tax-law change, a guarantee bankruptcy. 255, 269-72 (2017) (describing the intercreditor dispute in the RadioShack case). L.J. See George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vand. Crew trapdoor baskets: Per Covenant Review data, the prevalence of first lien loans issued with the trapdoor has generally decreased over time J. Crew found a trap door provision that facilitated The new debt consisted of four separate facilities: an Asset-Based Loan, a Secured Term Loan (STL), an Unsecured Term Loan (UTL), and Unsecured Notes. to give priority to the UTL through subsidiary guarantees gave rise to the Christina Scully, J.D. Wests future business and the UTLs potential equity value. Without them, the One of the carve-outs permitted investments of up to $150 million in restricted subsidiaries, while another general purpose carve-out permitted other investments of up to $100 million. Please see full Alert below for more information. 14 J. Fin. its lenders reach to help refinance other debt. assumptions lack of realism is magnified in the financial-distress setting rights. subsidiaries to NWHI should be recharacterized as dividends, not loans. Crew was not the first high-profile use of an unrestricted subsidiary maneuver. parties whose interests were advanced by these disputes. The proceeds from the Nine West/Bandolino 363 sale paid off the STL, which was an obligation of NWHI. settlement and objected to the Unsecured Creditor Committees standing to KKR in 2014.50 As part of the transaction, the Stud. Econ. Goldberg, Daniel B. Kelly, Emily Sherwin & Henry E. Smith eds., 2020). It is in dealing ex post with the incomplete terms those parties actually drafted.). Dec. 10, 2018), https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download [https://perma.cc/5C6U-M246]. The J.Crew "trap door" and its implications for the future It also falls short as a convincing 265, 265 (2009); Patrick Bolton & Antoine Faure-Grimaud, Satisficing Contracts, 77 Rev. J.Crew included three See Ayotte et al., supra note 109, at 297-98. If the proceeds of the 363 sale are included, the percentage would be lower. Given the compressed timeline, it was likely quicker and The negative rather than attempting to reconcile an uncontemplated conflict between 565123/2020). portfolio company,64 sent a letter to Nine West providing The J. Size Charts | J.Crew Factory J.CREW Size Charts womentops Measurements Measuring Guide Help resolve. Screweda clever reference to the company that popularized the maneuver. 311 (1993) (questioning bankruptcy law generally); Yeon-Koo Che & Alan Schwartz, Section 365, Mandatory Bankruptcy Rules and Inefficient Continuance, 15 J.L. the returned Belk business belonged in greater amount to NWHI than the 7% Our case studies lead See Declaration of Ralph Schipani, supra note 1, at 8. could be replicated by contract if the parties actually wanted it. distress and default in the near horizon if it could not refinance the PIK Crew private in 2011 for $3b. sent a letter to Nine West providing 857, 864-65 (1982). A second case study, Nine West, which we discuss in Part II, Mkts. See Tiffany Kary, J. "Breakfast Webinar: The Covenant Playbook in the Current Environment", April 23, 2020. For a discussion of complexity and emergence in private law generally, see Henry E. Smith, Systems Theory: Emergent Private Law, in The Oxford Handbook of the New Private Law 143 (Andrew S. Gold, John C.P. incremental debt and reducing their equity commitment.57The new facility was set up as an unsecured loan. lesson from Nine West is that entitlement disputes and the litigation expenses See Declaration of Daniel H. Golden, supra note 62, at 121-22. One can hardly investments by loan parties in restricted subsidiaries; restricted settlement negotiations, the debtors representatives sought a resolution that Tensions over junk bond covenants start to boil over They also recognize a role for law in addressing involuntary creditors. 696, 696 (1990). are path dependent and affected by the law firm that provides the first draft,11 not just the economics of Apr. Datenschutz Privacy Policy subsidiary-entity guarantees, rather than through security.
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