J.C. Penney got a bankruptcy court judge’s approval on $900 million in new financing, but the onerous terms could still topple the firm into liquidation.
The mass merchant was expected to move forward on the debtor-in-possession facility with Silver Point Capital and H/2 Capital Partners, even though it offers restructuring terms leave left little room for error. The terms’ two deadlines require an agreement with first-lien lenders on a workable business plan by July 14, and exit financing commitments by Aug. 15. If Penney’s fails on this front, the cash-poor chain must put itself up for sale or liquidate if no acceptable offer materializes. Essentially, Penney’s lenders are now driving the bus and will decide the company’s fate on July 15.
Court documents indicate that Ad Hoc Crossholder Group, a consortium of lending competitors, was willing to provide what it says is a more flexible financing option. Aurelius and Aurelius Capital Master Ltd. are believed to be in the group, though there’s little clarity on the group’s members.
The Ad Hoc group filed court documents opposing the $900 million DIP facility, calling it a “selective rollup of prepetition first-lien debt, which is punitive to all other non-DIP Lender prepetition first-lien debtholders and virtually all other creditors.” The document also indicated that the Ad Hoc group had offered Penney’s better terms on a competing facility. A separate filing by Penney’s unsecured creditors committee indicates its support of the Ad Hoc group, noting too that the tight timetable allows the lending group of Silver Point and H/2 to “unilaterally…abandon the plan process in favor of a full-chain liquidation or other sale process in six weeks’ time.”
The $900 million DIP facility consists of $450 million in new money. Penney’s so far has been accessing its $500 million of cash collateral—the cash balances it brought into the bankruptcy—while operating under Chapter 11 court supervision.
At a court hearing on Thursday, Penney’s lawyer Joshua Sussberg of Kirkland & Ellis said the retailer didn’t have a choice, even if the alternative financing sounded better, because the arrangement wouldn’t get the approval of Wells Fargo, Penney’s bank lender and holder of the first lien on the chain’s assets.
U.S. Bankruptcy Court Judge David Jones said that while there were parts of the financing package that he didn’t like, approving the facility at least gave the retailer “a path forward.”
And Penney’s is running out of time. AlixPartners managing director Jim Mesterharm told Judge Jones that Penney’s would run out of cash around the end of August if it didn’t secure the financing.
At the moment, Penney’s can immediately access up to $225 million of the facility. In addition, the Ad Hoc Crossholder Group also agreed to participate in the rollup portion of the DIP in the amount of $53 million.
With the financing now in place, the next focus will on assembling a business plan that both first-lien lenders and Penny’s can agree on. If the merchant reaches an agreement with the first-lien lenders, it can then access up to another $225 million to continue operations while it negotiates an exit financing package.
“This is a positive first step forward that will help us execute our Plan for Renewal and store optimization strategy, continue working seamlessly with our vendor partners, fund our ongoing business operations and continue our focus on further developing the company’s go-forward business plan to successfully restructure J.C. Penney,” Jill Soltau, CEO, said.
In a regulatory filing with the Securities and Exchange Commission last month, Penney’s said it plans to shutter 242 locations, bringing its store network down to 604 as part of its exit plan. The current exit framework calls for Penny’s to split itself up into two firms, one as a real estate investment trust holding certain real estate assets of Penney’s, and the other a publicly-listed firm that is essentially the retail operating firm. Stores owned by the proposed REIT would be leased back to the operating company.
So far, Penney’s has reopened 304 locations shuttered amid shelter-in-place orders, and another 171 doors are slated to reopen by the weekend.
Penney’s filed a Chapter 11 petition for bankruptcy court protection on May 15 in a federal bankruptcy court in Corpus, Christi, Tex. It listed assets of $8.57 billion and liabilities of $8.03 billion.