Distressed Retailers Scour Loan Fine Print for Debt Tactics

Heavily indebted retailers J. Crew Group Inc. and Claire’s Stores Inc. are delving into their loan agreements to find creative ways to increase or reconfigure their debt, Bloomberg News reported on Tuesday. New York-based J. Crew is said to be seeking to take advantage of a clause in its loan agreement allowing it to shift its brand name, the crown jewel of its intellectual property, to an unrestricted entity in the Cayman Islands. By doing this, it may now be possible for J. Crew to borrow against the assets and use the proceeds to buy back a portion of its roughly $2 billion in debt at a discount. “We haven’t seen retail companies using IP assets and investment baskets like this before,” said Steven Ruggiero, head of research at R.W. Pressprich & Co. “They are taking advantage of valuable assets that haven’t been optimally utilized to find new creative ways to create liquidity to extend their existence.” Transferring assets and investments to unrestricted entities can hurt creditors because new secured debt issued against them can get priority over their claims, potentially lowering the value of their holdings and preventing them from being paid first in case of bankruptcy. These asset-shielding tactics aren’t exactly new to indebted retailers – Sears Holdings Corp. used a similar maneuver nine years ago in the spinoff of its popular Craftsman, Kenmore and DieHard lines. Cellular carrier Sprint Corp. created an unrestricted entity and moved its wireless spectrum assets into it. In October, it sold $3.5 billion of secured notes backed by those assets. Sprint has an option to issue another $3.5 billion of securities if it chooses. Just last week, lenders to Core Media Group Inc., the American Idol producer that filed for bankruptcy in April, filed a suit in a California court arguing that owner Apollo Global Management LLC had inappropriately shifted assets out of the business without the lenders being repaid.

Nortel Networks, PBGC Reach Bankruptcy Deal

Former telecommunications equipment maker Nortel Networks Inc. and the U.S. Pension Benefit Guaranty Corp. (PBGC) have reached a deal that clears the way for the company to end its eight years in bankruptcy, Reuters reported today. A trial had been set for January over the PBGC's claims against the company, which stem from the termination of Ontario, Canada-based Nortel's underfunded pension plan in 2009, which at the time had 22,000 participants. The PBGC has said it believes it is owed $708 million. According to court papers filed yesterday, Nortel agreed the PBGC could receive up to $565 million once creditors start getting repayments. In return, the agency agreed to support Nortel's bankruptcy plan.

Analysis: Government Changes Tack on Student Loan Forgiveness Program

Hundreds of thousands of people with federal student loan debt had not been too concerned because they were counting on a federal government program that would forgive those loans if they worked at least 10 years in a public service job, but that changed when the definition of “public service” was altered midway through the decade, according to a New York Times analysis yesterday. The American Bar Association and four lawyers who thought they qualified filed suit on Tuesday against the Department of Education after they received letters informing them that the qualification had changed. All four, according to the legal brief, might have picked different jobs, borrowed less or entered different repayment plans had they known the rules would change. The public service loan-forgiveness program began in 2007, and is available, according to the explanation on the program’s website, to employees of governmental organizations, 501(c)(3) nonprofit groups and other groups who hold “qualifying” public service jobs. People who are not sure whether a position qualifies can fill out a certification form that the Education Department reviews. It encourages borrowers to resubmit it each year, just to make sure they still qualify. Once employed, borrowers must work full time in a public service job or jobs and keep up their 120 monthly payments over 10 years. No loans have been forgiven yet, because 10 years have not passed since the first borrowers entered the program. The suit, filed in U.S. District Court for the District of Columbia, says that some borrowers received approval on their certification forms, then, years later, the entity servicing their loans reversed course, effectively ousting them from the program.


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Commentary: To Boost the Economy, Help Students First

Donald J. Trump has made bold and provocative campaign promises on taxes, trade, immigration and infrastructure, but there is one that could have an even more immediate and direct impact on economic growth: student debt relief, according to a commentary by Sheila Bair, president of Washington College and former chair of the Federal Deposit Insurance Corp, in yesterday's New York Times. Student debt now stands at $1.3 trillion. More than half of student borrowers are unable to repay their loans according to the original terms. In a well-intended but poorly executed effort to make college broadly accessible, the government has lent freely to students, with little attention to whether they can repay those loans. The result is that millions of young people are saddled with debt they cannot afford, accordant to Bair. The Department of Education has tried to provide relief through a complex web of alternative repayment plans, including those based on a borrower’s income. However, these plans are limited to certain borrowers and involve a confusing array of options and bureaucratic “recertification” requirements, which cause a large portion of young people to lose eligibility each year. Student debt relief is smart economics and smart politics for the new administration, according to the commentary.

 

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