Recently, J. Crew used a “back-door” provision in its credit facility to transfer approximately $250 million worth of intellectual property (“IP”) to an unrestricted subsidiary with the aim of borrowing against the transferred assets and using the proceeds to repay (or otherwise redeem or exchange) structurally subordinated debt of its parent at a discount. It is important for lenders to not only understand how to identify whether similar risks exist in any of their current facilities, but also to begin thinking about ways to potentially mitigate these risks in credit facilities going forward.

Analysis -

J. Crew transferred certain of its IP assets to an unrestricted subsidiary via a two-step process. As a first step, J. Crew used a $150 million basket permitting investments in non-guarantor restricted subsidiaries (as well as a $100 million general investment basket) to transfer $250 million of IP assets to a Cayman Islands restricted subsidiary (the “Cayman Investment”). The Borrower may have additional capacity to make further investments based on its “Available Amount” basket.