The retail graveyard has gained many new entrants this year, but it looks like J. C. Penney won’t be one of them.
In short, “No one is discussing a liquidation,” Penney’s bankruptcy attorney Joshua Sussberg of Kirkland & Ellis told the Honorable David R. Jones, who is overseeing the case at a court hearing Wednesday afternoon.
Seeking to distinguish Penney’s from other debtors who are often in a position where they are losing money, Sussberg said the key to the mass merchant’s survival is that it is “sitting on a cash position that’s $400 million better than the initially approved budget” at the start of the bankruptcy.
On July 18, Penney’s expected to have $642 million in cash July 18. The additional $400 million, which brings the cash position total to $1.04 billion, comes from higher operating cash receipts from earlier-than-planned store reopenings and from better-than-expected sales performance. And, apparently, that financial position is helping Penney’s generate investor interest.
“This is not a company that’s losing hundreds of millions of dollars a month. This is a company that’s reopened its stores, meeting its budget and is sitting on cash,” Sussberg said.
Contrary to a New York Post article claiming that private-equity firm Sycamore Partners made a $1.75 billion bid for Penney’s with plans to merge it with rival retailer Belk, Sussberg described that report as “ill-informed” and “completely untrue.” While Penney’s does have three possible bidders, each of the offers are within the context of Penney’s remaining a “standalone business,” he added.
Sussberg declined to identify the bidders, but said one was received on July 20 that included a credit-bid. That would mean first-lien lenders who provided the debtor-in-possession financing are looking to acquire the company. Their proposed structure is comprised of three components, essentially a division of assets into three separate companies among the lenders. The first would hold ownership of the ground lease properties, the second the distribution centers, and the third would be the operating company that would keep under its corporate umbrella the remaining assets, such as real estate interests, intellectual property and store operations.
In the July 20 proposal, the same lenders also provided a financing term sheet for the operating company. Sussberg said Penney’s has received other bids on just the operating company component, bids that if anyone is successful, could slip into the operating structure outlined by the first-lien lender proposal. Bidding procedures are expected to be submitted for bankruptcy court approval over the next week. While first-lien lenders typically have the advantage because they can use their credit-bid to help finance the purchase, they could also get outbid at a court auction.
Sussberg also said all interested parties are engaged in ongoing talks, and that there was nothing definitive yet other than that Penney’s is moving forward with the sale process. He also didn’t rule out the possibility that the operating company may include multiple participants. Sussberg told Judge Jones that an auction is expected in early August, with the buyer expected to “close on the sale this fall.”
Sussberg stressed that a “going concern is priority number one” in the Penney’s bankruptcy case. “All parties in interest are working in complete good faith [on a] reorganization of this 100-plus-year-old company,” he said.
Penney’s has reopened all of its stores, with 173 off-mall locations performing matter than its 520 mall locations. Comparable store sales have been improving, now down 26 percent versus down 33 percent since the reopening. Sales have become more challenging with the recent resurgence of the coronavirus outbreak in some parts of the country, and there is a correlation between its worst markets and the states that have the highest number of COVID-19 cases.
Sussberg said Penney’s continues to negotiate rent concessions, while also pushing back on suppliers that want cash-in-advance or cash-on-delivery terms. Instead, the retailer is asking vendors to accept shortened terms for either initial orders or for a limited time, before moving back to regular terms at a later date.
Penney’s filed its Chapter 11 petition for bankruptcy court protection on May 15. And the retailer said earlier this month that it was cutting 1,000 jobs as it moved to restructure operations. The company is conducting going-out-of-business sales at about 154 locations.
“There’s a lot of pressure to keep Penney’s open. People want the retailer to survive,” said retail consultant Walter Loeb.
Keeping Penney’s alive would give suppliers another avenue to sell their goods, a plus for the vendor community. And mall operators, such as landlords Simon Property Group and Brookfield Partners, are keen on keeping the retailer open. Penney’s is an anchor tenant at many of their malls, and keeping the retailer alive would help them keep the status quo at malls where co-tenancy clauses could come into play should the mass merchant exit those leases. Simon and Brookfield have been mentioned as possible bidders, potentially joining in partnership with Authentic Brands Group, the brand management firm that helped them bail out bankrupt Aérospostale and Forever 21.