The Good, the Bad and the Ugly of J.Crew Blockers

 

Investor fears over drop-down LMEs are well founded with moves undertaken by Altice France, Altice International, Oriflame and more recently Pfleiderer showing they are now likely here to stay in Europe. In response to these arm-twisting tactics, the inclusion of J.Crew protection in primary deal documentation, which is the antidote developed in response to such LMEs, has been ramping up in recent years and hit an all-time high in 2025 for both bonds and loans – a rare example where covenants are being tightened. On the face of it, this may be an encouraging sign that investors’ awareness (and loathing) on this issue is growing.

On the flip side, it could be viewed more cynically: that the inclusion of J.Crew protection has become little more than a tickbox exercise for some investors to get the deal over the line and the quality of the protection is just an afterthought. A 2025 European leveraged loan provides a good example, where following successful pushback from investors, a documentation changes memo noted that a J.Crew blocker would be incorporated into the terms of the senior facilities agreement. The inclusion of this protection would have hopefully eased their concerns – or so the investors may have thought. However, upon inspecting the drafting more closely, this J.Crew blocker in fact contained material weaknesses, which if exploited would still permit a drop-down transaction.

The learning from this is that not all J.Crew blockers are the same and each needs to be examined carefully to fully grasp the actual level of protection being provided. In this article, we do just that by looking at J.Crew blockers within European high-yield bonds and European leveraged loans (excluding add-ons and repricing transactions) issued in 2025.

In the spirit of Altice’s drop-down transactions (which could be seen as one inspired by the “Wild West”), each J.Crew blocker has been categorized into camps of affording investors either “Good,” “Bad” or “Ugly” protection.
 

If you haven’t already done so, we recommend that before reading this article you read our Covenant 101 mini-series on J.Crew blockers.

The first installment focuses on the drop-down transaction that J.Crew undertook, which led to the creation of the J.Crew blocker. We then explain how the J.Crew blocker works to prevent the transfer of material assets outside of the borrowing group, and the assets typically covered by the blocker.

In the second installment, we consider the different types of J.Crew blockers seen in the market and assess how effective the different types of blockers are in preventing the mischief they are intended to address.
 

The inclusion of some form of J.Crew protection in both European high-yield bonds and leveraged loans hit an all-time high in 2025, although loans far outstripped bonds in this regard.

J.Crew protection featured in 89% of 2025 loans for LBOs and full refinancings and 44% of 2025 European high-yield bonds, continuing an upward trajectory from 2024 following the reverbations caused by Altice France’s drop-downs leading to a surge in such protection that year.

Still, the relatively low take-up in bonds is rather surprising, particularly in light of the fact that nearly all of the companies that have undertaken aggressive LMEs in Europe have bonds (or have only bonds) in their capital structure.
 

 

 

Now for the really interesting part – how good are J.Crew protections even if included?

Our categorization of what constitutes “Good,” “Bad” or “Ugly” J.Crew protection depends if any one or more of the following major defects or loopholes are included.

J.Crew protection is considered “Ugly” if any one, or multiple, of the following defects or loopholes are present:
 

• Protection only applies if the transfer is considered to result in a “Material Adverse Effect”;
   
• Protection does not prohibit the use of both restricted payment and permitted investment capacity;
   
• Protection does not cover both the transfer of assets to an unrestricted subsidiary and the designation of a restricted subsidiary as unrestricted; and
   
• Protection contains any other material carve-out or major defect to its application. This includes, for example, the prohibition not covering transferring assets from nonguarantors restricted subsidiaries to unrestricted subsidiaries.
   

J.Crew protection is considered “Bad” if as follows:
 

• Protection is limited to material intellectual property and rights but not other assets; and
   
• Contains none of the major defects or loopholes mentioned above.
   

J.Crew protection is considered “Good” if:
 

• Protection extends beyond material intellectual property to cover other material assets of the group; and
   
• Contains none of the major defects or loopholes mentioned above.
   

Quite literally we found the results to be rather ugly for European high-yield bonds. Around 71% of the J.Crew blockers in 2025 European high-yield bonds fell within the “Ugly” category due to the presence of one or more material loopholes or defects. Only around 25% of the J.Crew blockers in 2025 European high-yield bonds fell within the “Bad” category, with the remaining 4% sitting within the “Good” rating by expanding protection to cover all material assets. That is quite a poor outcome aggravating the low prevalence of J.Crew in bonds in the first place.

The picture for 2025 European leveraged loans is more varied compared with European high-yield bonds. There was nearly an equal split among the J.Crew blockers within 2025 European leveraged loans within the “Ugly” and “Bad” ratings (44% and 46%, respectively), while around 10% sat within the “Good” rating.

What is driving the disparity between the strength of J.Crew protection in European high-yield bonds and European leveraged loans is not immediately clear. Lack of awareness should simply not be an excuse at this stage so we would like to rule that out. Given that a significant majority of drop-down transactions in Europe have happened where companies only have bonds in the capital structure, investors should really know better.

Shorter marketing periods for high-yield bonds might play a part with investors not having the time to get into the nitty-gritty of the documentation, but even that is a weak justification at best.
 

 

J.Crew blockers are eponymously named after the liability management exercised by U.S. fashion retailer J.Crew, in which case, the trademark and brand name was transferred to an unrestricted subsidiary for the purpose of raising debt on such assets to boost the group’s liquidity position.

Following J.Crew, protections were incorporated into documentation that would limit a future transfer of material intellectual property outside the restricted group. That makes sense for a high street retailer like J.Crew, where the brand name is likely its biggest asset, but it may not be appropriate for other companies that have other significant assets available to fund a drop-down transaction. To put it in perspective, a J.Crew blocker covering only material intellectual property would unlikely have been enough to prevent the Altice France and Altice International drop-downs (or at least they could have been fairly easy work-arounds to achieve a similar outcome even if such protection had been included). A J.Crew blocker covering any material assets would have likely been more effective, particularly in the case of Altice International in light of the size of the businesses that have been dropped down in that case.

This area continues to be a key shortcoming in J.Crew protection as only 10% of European high-yield bonds and 10% of European leveraged loans expanded the J.Crew blocker to cover all material assets of the group other than just intellectual property.

Some deals had even better coverage: In Globe Trade Centre Senior Secured 2030s, the blocker was expanded to cover all assets of the group while SNF (formerly SPCM SA) Senior 2032s actually specified the manufacturing facilities that were protected by the blocker.

For European leveraged loans, when the blocker was expanded it covered “any material asset of the Group.”
 

 

Another common loophole is that J.Crew blockers may only expressly prohibit “transfers” of material intellectual property or assets to unrestricted subsidiaries. One may think this express prohibition on transfers would be sufficient to prohibit a drop-down transaction from occurring.

However, as we explained in this paragraph in our analysis of Altice International’s drop-down, there are two ways to effect a drop-down

“Altice International can effect a drop-down in two ways: (1) Create a new holding company, designate it as an unrestricted subsidiary and transfer the shares or assets of the entities being dropped down to such newly created unrestricted subsidiary or (2) its board of directors simply waves a “magic wand” or, in indenture speak, files a copy of the board resolution designating the relevant entities and an officer’s certificate that the designations comply with the restricted payments covenant, which is likely to have been met with adequate investments capacity.”

J.Crew blockers that limit protection to only “transfers” prohibit only the first action above and would still permit a restricted subsidiary holding material intellectual property or assets to be designated as an unrestricted subsidiary via the magic wand route. Once designated as an unrestricted subsidiary, the entity is free to raise new debt on those assets. This circumvention of J.Crew blocker protection, known as the designation loophole, is real and was successfully exploited in the case of Envision Healthcare.

Once again European high-yield bonds came out worse in this regard. Around 39% of J.Crew blockers in European bonds fail to expressly prohibit the designation of a restricted subsidiary holding material intellectual property or assets as an unrestricted subsidiary. For European leveraged loans, this figure is much lower at 16%.

A number of high-yield bonds issued in 2025 (Asda, DeepOcean, Evoke plc, OVHcloud) fell short in providing this protection by only prohibiting the transfer of material intellectual property to a restricted subsidiary “in contemplation of designating such a subsidiary” as unrestricted. This would still permit any restricted subsidiary that already held material intellectual property to be designated as unrestricted.
 

 

Protection afforded by a J.Crew blocker will in some cases only apply if the transfer of material intellectual property would result in a “Material Adverse Effect.” This qualification is concerning for investors since a “Material Adverse Effect” condition will impose a much higher bar.

The transfer (if it were to occur) of such material IP would likely have to cause the company to be unable to operate its day-to-day business or meet its payment obligations under the debt. Given that the IP would still be held by a subsidiary or the company, just not a restricted subsidiary, this seems unlikely.

In addition, some bonds define “Material Adverse Effect” by cross-referencing to the definition in the loan documentation and accordingly the strength of the protection in the bond could be diluted by the term being amended by lenders under the loan without the consent of the noteholders.

See the second installment of our Covenant 101 mini-series on J.Crew blockers for a deeper discussion on this issue.

No second guesses for which asset class fared worse on this metric. A “Material Adverse Effect” qualifier featured in 37% of J.Crew blockers for 2025 European high-yield bonds, compared with 21% for European leveraged loans, both concerningly high.
 

 

To transfer material assets outside the restricted group, the company will typically need sufficient general purpose investment capacity under its covenants.

Such investment capacity is the aggregate of general purpose restricted payment baskets (“restricted investments” being a sub-category of restricted payments alongside other payments such as dividends and prepayments of subordinated debt) and general purpose “permitted investment” baskets.

Failure of a J.Crew blocker to prohibit transfers utilizing any and all such sources of investment capacity can leave the door open to a drop-down still being possible.

Around 13% of J.Crew blockers in European leveraged loans failed to prohibit the use of both the restricted payment capacity or permitted investment capacity for a drop-down transaction, whereas this weakness featured in only 7% of European high-yield bonds.

The prohibition in nearly all these cases covered the use of permitted investment capacity with restricted payment capacity being omitted. The failure to prohibit restricted payment capacity is a significant oversight given this would include other major sources for value leakage such as the CNI builder basket.

An example of this weakness is seen within DOC Pharma Senior Secured 2032 (with FRNs) as highlighted below:

“Notwithstanding anything contrary herein, the consummation of any transaction (whether by way of sale, conveyance, transfer, or other disposition, and whether in a single transaction or series of related transactions) that results in the transfer of Material Intellectual Property from the Issuer or any Restricted Subsidiary to an Unrestricted Subsidiary, including via designation of a Restricted Subsidiary owning Material Intellectual Property as an Unrestricted Subsidiary, shall not constitute a Permitted Investment.”
 

An issue that is often left unaddressed by J.Crew blockers is that the transfer of material intellectual property or other material assets to unrestricted subsidiaries is not the only way companies could use valuable assets to raise debt that would prime lenders. This priming transaction could also be structured within the restricted group by moving assets from guarantors into nonguarantor restricted subsidiaries. As this transfer was made within the restricted group, under high-yield style incurrence covenants that typify high-yield bond and leveraged loan covenants these days there is no required investment capacity, i.e., such transfers are generally permitted without restriction.

The nonguarantors could then use the material assets to support a debt raise provided there is sufficient capacity under the documentation for structurally senior debt and any guarantor coverage test (typical in loans, but generally not included in bonds, which would need to rely indirectly on the coverage test in the other loans or revolving credit facilities in the capital structure) continues to be met. If permitted, all this debt incurred by nonguarantors restricted subsidiaries would prime the debt of lenders under the bonds or loans.

In 2025, we saw a small number of loans (four deals) restrict this sort of priming transaction by including an enhanced form of J.Crew protection known as “Pluralsight” protection, which requires that material intellectual property or material assets can only be held by guarantors. As “Pluralsight” protection is such an outlier in the market, and as far as we are aware the loophole is yet to be exploited in Europe, the lack of a Pluralsight blocker is not included in the quality analysis and categorization in this article. If they were included, they would further skew the numbers toward the ugly end.
 

Outside of the common defects and loopholes mentioned above, there are a number of other weaknesses that crop up when examining J.Crew protection.

A small handful of blockers only prohibited the transfer of material intellectual property from obligors (i.e., the borrower / issuer and guarantors) to unrestricted subsidiaries. This could be exploited to allow for the transfer of assets from non-obligors (nonguarantor restricted subsidiaries) to unrestricted subsidiaries. This weakness was seen in around 7% of European leveraged loans and 4% of European high-yield bonds with J.Crew blockers.

Another weakness we have seen a few times is that the primary purpose of the asset transfer must be to raise debt on such assets and that the amount of debt could not have been incurred under the [existing] terms.

Amongst all the ambiguities this presents, such a formulation will allow for transfers of assets to unrestricted subsidiaries if the group does have sufficient debt capacity on any basis (structurally senior, effectively senior or pari passu secured basis) under the terms of the debt. This weakness was seen in around 6% of European high-yield bonds with J.Crew blockers and 4% of European leveraged loans.
 

With drop-downs (and more broadly LMEs) seemingly here to stay in Europe, investors will do well to focus not only on whether the debt documentation includes a J.Crew blocker, but also the relative strength or weakness of the blocker. Octus’ legal analysts can help you with that.