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Pulling a “J. Crew” – Loopholes in Loan Documents Create Fashionable Surprises

by | Jun 22, 2022 | Business, Debt

By: Laura Day DelCotto

Showing my age, I have loved J. Crew since the preppy days of the 1980s. When I was pulling a J. Crew, that usually meant I was using my father’s credit card to go to the mall and get some pink and green.

However, in 2022, “pulling a J. Crew” has a totally different meaning in the world of debtor/creditor relations. While J. Crew borrowers and lenders were not the first or only, the J. Crew situation received the honor of the “lingo title” for a surprise priming of existing liens in exchange for new money from a new lender. Other prominent names include Neiman Marcus and PetSmart.

As the Lender…

Don’t get caught off guard! As a lender, it is now time (past time) to do a thorough review of your loan docs with counsel, to see what loopholes are available to your borrower to shift out your collateral in exchange for some new money. While you may think this can’t be done, it is all about the loan docs. It is worth this due diligence and closing any loopholes you find.

Trust me when I say that you do not want to get caught up in intra-creditor disputes. They are ugly, costly, and often exceedingly acrimonious.

As the Borrower…

As a borrower, while there is risk, if there are loopholes in the loan documents, then there is nothing illegal in using them to survive and get fresh liquidity. A company can and will move collateral away from existing lenders to secure new or restructured debt. Fights will ensue, but the assets have shifted to other subsidiaries. It may take years and extensive litigation to determine if the moves will be unwound or stand.

Money has essentially been free for a long time now. Private equity lenders have had so much dry powder chasing deals that they have done silly deals, and deals without any substantial loan covenants. Now is the time for documents to be reviewed before things turn around.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset preservation and business restructuring law firm known for its commitment to the lifetime success of its clients. DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.