Moody’s drops J. Crew, notes, loan

Moody's Investors Service said it downgraded Chinos Intermediate Holdings A, Inc.'s (indirect parent company of J. Crew Group, Inc.) corporate family rating to Caa2 from B3, probability of default rating to Caa2-PD from B3-PD and the rating on its PIK toggle notes to Ca from Caa2.

The speculative grade liquidity rating was also downgraded to SGL-3.

Concurrently, the agency downgraded J. Crew Group's secured term loan to Caa1 from B2.

The outlook is stable.

Moody’s said the downgrade to Caa2 reflects the continued declines in J. Crew's revenue and EBITDA that, when coupled with its high debt load, has led to very high leverage and an unsustainable capital structure.

For the nine months ended Oct. 29, the company’s revenue and adjusted EBITDA (as defined by the company) declined 3.6% and 14.1% respectively, and EBITDA margin declined nearly 100 basis points to 7.9%. This compares to a 15.2% EBITDA margin at the end of 2013, the year in which the company paid its $500 million debt-financed dividend.

Balance sheet leverage (calculated using unadjusted J. Crew and Chinos debt and company EBITDA) approached 11.5 times and EBITDA-Capex/Gross Interest (including non-cash PIK toggle interest) is less than 1 time.

“At this level of performance, the company's capital structure is unsustainable. Thus, the company faces a heightened probability of default, including the potential for a distressed exchange, over the next 12 to 18 months,” Moody’s said.

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