J. Crew Trapdoor: An Overview

The J. Crew trapdoor is a maneuver employed by companies like J. Crew, Neiman Marcus, PetSmart, and others to transfer assets to unrestricted subsidiaries, beyond the reach of their creditors. It involves a two-step transaction where assets are transferred from obligors to non-guarantors and then from non-guarantors to outside the credit box. The specific loophole that enables this trapdoor is a provision in the credit agreement known as the J. Crew proceeds basket. This loophole allows non-guarantor restricted subsidiaries to make investments funded with pro investments made in those subsidiaries, effectively transforming it into a general purpose basket.