J.Crew receives early tenders for 93.6% of notes, extends deadline

New York, June 26 – J.Crew Group, Inc. said it received early tenders for $530,472,449, or 93.6%, of the $566.5 million of 7¾%/8½% senior PIK toggle notes due 2019 issued by Chinos Intermediate Holdings A, Inc.

The response does not include a further 6% of the outstanding notes which may be withheld from the exchange offer under the terms of the June 12 restructuring support agreement.

If these further notes are tendered, the response rate will be 99.6%, enough to satisfy the minimum tender condition of a 95% response, according to a news release.

J.Crew said it is extending the early tender deadline to 11:59 p.m. ET on July 10 from 5 p.m. ET on June 23.

The new deadline matches the expiration of the offer so that all holders who participate will receive the total consideration.

Because the withdrawal deadline has now passed, tendered notes may not be withdrawn.

As announced on June 12, the private exchange offer is being held by J.Crew Brand, LLC and J.Crew Brand Corp., both indirect wholly owned subsidiaries of J.Crew, and Chinos Holdings, Inc., the ultimate parent of J.Crew.

Holders are being offered:

• Up to $250 million of 13% senior secured notes due Sept. 15, 2021 to be issued by J.Crew Brand, LLC and J.Crew Brand Corp.;

• Up to $190 million of Chinos Holdings’ 7% non-convertible perpetual preferred stock, series A; and

• Up to 15% of Chinos Holdings’ class A common stock.

J.Crew said the purpose of the exchange offer is to refinance the old notes to reduce the consolidated debt of Chinos Holdings and its subsidiaries and to extend the average maturity of that debt.

The exchange offer is conditioned on a minimum of 95% of the outstanding old notes being tendered. This condition may not be waived without the consent of certain holders of outstanding old notes and their affiliates that also hold a portion of term loans under the company’s term loan facility (the “ad hoc creditors”).

Eligible holders who tender their old notes by the early deadline will receive the total exchange consideration, which will consist of $441.308013 principal amount of new notes (including a $40.00 early tender payment), $335.394 initial liquidation preference, or 0.335394 shares, of series A preferred stock and 30.695204 shares of class A common stock.

Under the original terms, eligible holders who tender after the early deadline but prior to the offer expiration will receive the exchange consideration, which is the total exchange consideration less the $40.00 early tender payment. As revised, all participants will receive the early tender payment.

The settlement date is expected to be three business days after the expiration time.

Noteholders whose old notes are accepted in the exchange offer will not receive additional consideration for any accrued interest from and including the last interest payment date to but excluding the settlement date.

Old notes tendered in the offer will not be canceled but will continue to be held by J.Crew Brand, LLC.

The new notes will be fully and unconditionally guaranteed on a senior secured basis by J. Crew Brand Intermediate, LLC, the direct parent of J.Crew Brand, LLC; J. Crew Domestic Brand, LLC and J. Crew International Brand, LLC, each of which is an indirect domestic subsidiary of J.Crew.

J.Crew Brand Corp is a wholly owned subsidiary of J.Crew Brand, LLC, has no assets and is not expected to have any cash flow to apply to payments on the new notes.

The new notes will be secured by (a) first-priority liens on (i) the initial transferred IP (as defined below), (ii) J. Crew Domestic Brand’s rights under the intellectual property license agreement that it entered into on Dec. 6 with J.Crew International, Inc., an indirect wholly owned subsidiary of J.Crew, and J.Crew Operating Corp., a direct wholly owned subsidiary of J.Crew, pursuant to which J.Crew International transferred a 72.04% undivided interest in some of its U.S. intellectual property assets (the "initial transferred IP") to J. Crew Domestic Brand, (iii) a pledge of 100% of the equity interests of the new notes co-issuers and the subsidiary guarantors and (iv) substantially all other assets of the new notes co-issuers and the guarantors; and, in the event the term loan transactions, are completed, (b) second-priority liens on (i) the additional transferred IP and (ii) J. Crew Domestic Brand’s rights under the new intellectual property agreement that it will enter into on the settlement date with J.Crew International and J.Crew Operating.

J. Crew Domestic Brand’s assets currently consist solely of the initial transferred IP, consisting of certain U.S. intellectual property rights currently used by J.Crew and its subsidiaries in the conduct of their business, and its rights under the A&R IP license agreement. Under the A&R IP license agreement, J.Crew and some of its subsidiaries will continue to exclusively use the transferred IP and J.Crew Operating, on behalf of J.Crew International, will pay to J. Crew Domestic Brand a fixed license fee of $42.5 million per year or, in the event term loan transactions are completed and the additional IP license agreement entered into, an aggregate of $59 million per year, payable semiannually.

The 7% dividend rate on the new preferreds will be payable at a rate of 5% per year in cash and 2% per year in kind.

Equity recapitalization

Subject to and concurrent with the closing of the exchange offer, a majority in interest of the current holders of Chinos Holdings' class L common stock, including TPG Capital, LP and Leonard Green & Partners, LP, will elect to convert all the outstanding shares of class L common stock into 95,350,555.66 shares of Chinos Holdings' class A common stock and 110,000 shares of Chinos Holdings' 7% non-convertible perpetual preferred stock, series B.

The series B preferreds will have an initial liquidation preference of $1,000 each, or $110 million in the aggregate, and will be pari passu with the new series A preferred stock.

After distributions have been made on the new series B preferred stock that equal their liquidation preference and all accrued dividends thereon, the holders of the new series B preferred stock will be entitled to receive, in the aggregate, roughly 3% of the sum of any distributions made on the class A common stock.

In connection with the exchange offer, J.Crew intends to implement a new management incentive plan, under which it expects that certain officers and employees will be entitled to receive equity awards of up to 10% of the class A common stock outstanding after the exchange offer and up to $20 million initial liquidation preference of additional new series B preferred stock.

The class A common stock component will dilute all holders of the class A common stock.

Term loan transactions

Concurrently with the exchange offer, the company was seeking to amend its March 5, 2014 credit agreement with Wilmington Savings Fund Society, FSB as administrative agent.

If requisite consents are received for the term loan amendment, the company will engage in a series of transactions concurrently with the settlement of the exchange offer, including the purchase of $150 million principal amount of term loans held by lenders who consent to the term loan amendment at par plus accrued interest thereon; additional borrowings under the term loan agreement of $30 million principal amount (at a 2% discount), to be provided by new or existing lenders, or in lieu thereof, one or more sponsors, the net proceeds of which will be applied by the company to finance the refinancing, redemption or repurchase of term loans referenced above; the issuance of $97 million principal amount of new private placement notes at a 3% discount in a private placement, the proceeds of which will be lent on a subordinated basis by J.Crew Brand, LLC to J.Crew to finance the refinancing, redemption or repurchase of term loans referenced above; the contribution by J.Crew International to J. Crew Domestic Brand of the remaining undivided 27.96% ownership interest of certain U.S. intellectual property rights not previously included in the initial transferred IP; and a direction to the term loan agent to dismiss, with prejudice, certain litigation relating to the assignment of the initial transferred IP.

The exchange offer is not conditioned upon approval of the term loan amendment.

However, if requisite consents for the term loan amendment are obtained, the settlement of the exchange offer will be conditioned upon the completion of the term loan transactions.

J.Crew announced on June 16 that the term loan lenders had approved these transactions.

Restructuring support agreement

The ad hoc creditors entered into a restructuring support agreement on June 12 with Chinos Holdings and some of its subsidiaries.

The ad hoc creditors agreed to take certain actions in support of the term loan transactions, including voting in favor of the term loan amendment and, if the term loan transactions are consummated, purchasing $97 million principal amount of the new private placement notes in the concurrent private placement.

In addition, the ad hoc creditors hold about 67% of the outstanding old notes and have agreed to tender their old notes in the exchange offer, provided that each ad hoc creditor may withhold or tender in its discretion 3% of the outstanding old notes (6% total), and provided further that if one ad hoc creditor tenders any withheld old notes in the exchange offer, the other ad hoc creditor is required to tender its withheld old notes.

Private placement

The company, the new notes co-issuers and the guarantors entered into a note purchase agreement on June 12 with the ad hoc creditors.

In the event the term loan transactions are completed, the ad hoc creditors will purchase $97 million principal amount of an additional series of 13% senior secured notes due 2021 to be issued by the new notes co-issuers at a 3% discount in the concurrent private placement.

The new private placement notes will be governed by an indenture substantially in the form of the new notes indenture and will also be guaranteed by the guarantors.

If the term loan transactions are completed and the new private placement notes are issued, the new private placement notes and the guarantees thereof will be secured by (a) first-priority liens on (i) the additional transferred IP, (ii) J. Crew Domestic Brand's rights under the additional IP license agreement, (iii) the IP group pledge and (iv) the other IP group assets and (b) second-priority liens on (i) the initial transferred IP and (ii) J. Crew Domestic Brand's rights under the A&R IP license agreement.

Consent solicitation

In conjunction with the exchange offer, the old notes issuer is soliciting consents to suspend, subject to certain conditions, substantially all of the covenants, restrictive provisions and events of default under the indenture governing the old notes and provide the old notes issuer, any guarantor under the old notes indenture and any of their respective affiliates, in each case, that holds the old notes, with the ability to vote on directions, waivers and consents under the old notes indenture.

The exchange offer is conditioned upon the completion of the consent solicitation.

The amount of old notes that the ad hoc creditors have promised to tender is enough to ensure adoption of the proposed amendments, which will become operative only upon completion of the exchange offer.

Holders who tender in the exchange offer will be deemed to have delivered their consents, and holder may not deliver consents without tendering their old notes.

The offer is open to noteholders who are either qualified institutional buyers under Rule 144A or not U.S. persons under Regulation S.

The information agent is D.F. King & Co., Inc. (800 714-3306, 212 269-5550 or jcrew@dfking.com).

J.Crew is a retailer of women’s, men’s and children’s apparel, shoes and accessories. The company is based in New York.

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