June 7, 2017 - An important report published by Moody’s last week suggests that secured lenders may be more exposed to stressed retailers than has historically been the case.  The reason:  A number of retailers, like J. Crew, Neiman Marcus and Claire’s Stores, have transferred valuable assets, primarily their intellectual property such as brand names, to unrestricted subsidiaries outside their credit agreements’ reach.   More alarmingly, Moody’s estimates that 25 retail and apparel companies currently rated B3 or lower (83% of such companies!) also have the ability under their credit agreements to do the same.  These transfers allow companies to raise new debt at the transferee level secured by the intellectual property and Moody’s notes that companies with good brands and legitimate deleveraging potential (i.e., a path to achieving a financeable capital structure) pose the greatest risk of transferring assets.  Finally, Moody’s warns that these types of transfers can harm existing secured lenders because they create a new class of secured debt that has a superior claim on the relocated assets that originally collateralized the existing lenders.  The LSTA will be hosting a webinar on this important trend presented by Jim Millar of Drinker Biddle and Brendan Hayes of Millstein on July 11th.  The Moody’s report is available here.

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