J. Crew's attempt to execute a simultaneous spinoff and initial public offering of its Madewell brand may have hit a roadblock, as talks "with certain holders of loans and securities" have ended with no agreement reached and no further discussions scheduled, according to documents filed last Friday with the Securities and Exchange Commission. The company filed that disclosure, along with its own proposal delineating how debt would be traded for a stake in the new Madewell entity and the lenders' proposal, on the same day the IPO paperwork was filed.
Because the lenders as a group, as part of a debt swap last year, had stipulated that the company needed their permission before selling Madewell or taking it public, the two sides' failure to agree could imperil the IPO, according to the Wall Street Journal's Bankruptcy report, which first noted the disclosure's implications. J. Crew didn't immediately return Retail Dive's request for comment. A Madewell spokesperson declined to comment, noting in an email that the IPO filing necessitates a quiet period.
S&P Global downgraded J. Crew Group on Thursday after the company disclosed that talks with lenders included a possible distressed exchange for debt that the ratings analysts equate with default, as it would fall short of original terms. Analysts with the ratings agency still see the IPO, and a distressed exchange with it, as "more likely" and have a negative outlook for J. Crew's rating.
J. Crew's debt has hampered its operations for years now, including its own plans for an IPO and a fleeting proposal of a sale to Uniqlo owner Fast Retailing.
Now it appears to be a complicating factor in the proposed separation of the ailing J. Crew brand from the more prosperous, if smaller, Madewell brand.
"Assuming it would be a default, which I imagine it would be, that tells me that when or how the Madewell IPO gets completed would seem to be questionable," Pat Collins, a partner at law firm Farrell Fritz with expertise in bankruptcy, restructuring and distressed retail, told Retail Dive in an interview. With "no immediate deal with a key lender constituency," restructuring debt would have to be accomplished some other way, including, possibly, through a bankruptcy, Collins also said.
The conditions for an IPO of Madewell are less than ideal even without the complications of the proposed debt shuffle, according to some analysts.
"The IPO timing might not be the best given the volatility in the financial markets due to China tariffs, rising oil prices, slowing consumer spending on apparel, and rising federal debt," Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive earlier this week. "This brand is resilient. However, fashion [IPOs] in this type of marketplace might need more than good gross margin profits and strong revenue generation to appease the financial wizards on Wall Street right now."
According to Columbia University Business School retail studies professor Mark Cohen, the deal would at best have mixed results: While a spinoff might work for Madewell, it could signal the end for J. Crew, he said in an email, and compared the two brands' situation to the imminent separation of Old Navy and Gap.
"While Madewell may make a go of it (as likely will Old Navy), clearly the last thing J Crew needs is an unfettered competitor," he said. "Well, this looks like the same old movie which always is likely to have the same old crappy ending. I think Madewell will be OK. J Crew will not. Just as I think Old Navy will be OK while Gap will not."