Observer Lite: 1/16/2025

JO…and another bankruptcy filing
National retailer of sewing, fabrics, arts and crafts, and select home decor products JOANN Inc. filed for bankruptcy protection under Chapter 11 for the second time in nine months.

The company operates (and leases) 800 retail stores and three distribution centers generating $2 billion of calendar year 2024 revenue.

Founded in 1943, JOANN listed on the American Stock Exchange in 1969 (subsequently joined the NYSE in 1976) and opened its 500th store by 1980. The company was purchased by private equity sponsor Leonard Green & Partners in a 2011 take-private deal.

The COVID-19 pandemic led to a boom in business (23.5% sales increase from FY2020 to FY2021) allowing the company to IPO in 2021 on the NASDAQ. By early 2024, JOANN filed for chapter 11 bankruptcy to implement a prepackaged plan of reorganization focused solely on reducing its funded debt load.

Despite emerging from the 2024 bankruptcy in just 6 weeks, JOANN management now says the combination of macroeconomic headwinds and unanticipated inventory challenges in the months since has forced another bankruptcy filing.

According to filings, JOANN accrues $26 million in lease and occupancy-related expenses each month (16% of total revenue).

A review of SEC filings shows net lease REIT W.P. Carey (NYSE: WPC) acquired JOANN’s Opelika, AL warehouse distribution center (703,000 square feet) in June 2021 for $48.9 million and maintains ownership per county tax records.

Separately, JOANN executed a sale/leaseback of its Hudson, OH distribution center and office for $34.5 million in the second half of 2023. The buyer/owner is unknown. JOANN’s Visalia, CA distribution center appears to be owned by EQT Exeter.

Capital competition
The growth in private credit may be one of the reasons for more subdued sale/leaseback capital in recent quarters. Although its cost (yield) is typically well above leaseback cap rates, private capital represents an alternative funding source that does not require selling assets.

KBRA’s recently released 2025 private credit outlook provides several interesting nuggets (quoted directly from the report; emphasis added):

• KBRA believes some of the obligors who struggled to service their debt and delayed defaults in 2024 may have to face the music. These obligors contribute to a higher projected default rate estimated at 3% by count in 2025.

• Private credit’s share of the growing loan market will be challenged by the banking sector which has come roaring back amid strengthening balance sheets, the prospect for much-tempered changes to regulatory capital requirements, and the health of the broadly syndicated loan (BSL) market. KBRA believes competition will continue to squeeze loan spreads and could have future negative impacts on undisciplined private lenders that are too aggressive on leverage, credit agreement terms, and pricing.

• With private credit’s total addressable market pegged at $40 trillion by some, KBRA believes the significant growth opportunities lie in investment-grade (IG) debt and specialty finance.

• Heightened competition could also negatively impact future credit quality and recoveries if private credit offers higher leverage or other borrower-friendly terms to secure deals. A notable example is the period from 2021 to early 2022 when intense competition for LBOs pushed leverage for new deals to pre-crisis levels of 7.1x. Today, KBRA has observed a growing number of deals with over eight turns of leverage.

-Sean Hostert