Coty Debt Deal Shows Investors Burned by J. Crew Are Now Awake

(Bloomberg) -- Debt investors are honing in on aggressive terms in debt deals that limit creditor access to assets, seeking to avoid the fate of lenders stung in 2016 by J. Crew Group Inc.

Beauty product maker Coty Inc. began marketing a $7 billion debt deal earlier this year with initial documents that would have allowed the company to move investments to entities beyond creditors’ reach. Those clauses, which can sap value from the debt, were removed from the final offering after investors objected to them, people with knowledge of the matter said.

Lenders are hardening to an “anything-goes” market for junk debt, after demand for more yield wore protections down to the weakest levels. Preppy retailer J. Crew drew scrutiny to punchier terms when in 2016 it attempted to shunt its brand name out of reach of secured creditors. Just last week, a bond offering by American Greetings Corp. met resistance when investors sought stronger limits to how much cash the greeting-card seller could funnel to its private-equity owners.

Representatives for New York-based Coty as well as JPMorgan Chase & Co. and Bank of America Corp., part of the bank syndicate overseeing the company’s refinancing, declined to comment.

Efforts to eliminate the clauses known as “trapdoor” loopholes from debt documents gained traction in Europe late last year, with a number pulled from deals. Debt analysis firms including Xtract Research and Covenant Review have drawn attention to the provisions and urged investors to seek their removal.

Coty, whose high-end beauty products include fragrances for Tiffany & Co. and Gucci Bloom, settled on a package that included a $1 billion loan, a $3.25 billion revolving credit facility and some euro-denominated loans. It also offered high-yield bonds in both currencies.

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