DISTRESSED DAILY: Borrowers Seek Variations on J. Crew Trapdoor

Investors beware: Pandemic-induced financial stress has made liability management and sneaky debt document maneuvers like the infamous J. Crew “trap door” all the more popular for distressed companies, according to research firm Covenant Review.

J. Crew Group included language in a credit agreement nearly five years ago that let it transfer valuable intellectual property into a subsidiary that wasn’t subject to bond and loan covenants. It ultimately borrowed against those assets, stoking credit ire. Similar “classic” uses of the trapdoor can still be found in the market, but investors have “mostly gotten wise to the shenanigans,” analyst Ian Feng wrote ...