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Why Is JCP Paying $7.5M in Executive Bonuses, Days From Expected Bankruptcy?

J.C. Penney & Co. Inc. is accelerating performance awards for some of its executives, just days before the retailer is expected to file for bankruptcy court protection as early as Friday.

A regulatory filing on Tuesday with the Securities and Exchange Commission shows that the fiscal 2019 performance awards were supposed to be paid after the end of fiscal 2021, or post January 2022. The awards, in consultation with Penney’s legal and compensation advisors, will be paid immediately, the filing said. The change in terms enables Penney’s to incentivize and encourage certain employees to continue working at the troubled retailer.

The filing says Penney’s is set to pay $4.5 million to CEO Jill Soltau; and $1 million each to Bill Wafford, executive vice president (EVP) and chief financial officer, Michelle Wlazlo, EVP and chief merchant, and Brynn L. Evanson, EVP and chief human resources officer. In order to receive the accelerated payments, each executive must waive any performance bonus award for fiscal years 2020 and 2021.

The struggling mass merchant has missed two interest payments that total $29 million. The retailer isn’t expected to meet either debt obligation this week, rendering Penney’s in default on those payments.

The mass merchant has been in talks for debtor-in-possession financing, as well as with potential investors so it can file a pre-packaged bankruptcy that will give it some expectation of coming out of Chapter 11 proceedings as a going-concern business. Presuming that scenario comes to pass, the plan would still need the approval of a majority of its creditor constituency groups, not to mention the nod of the bankruptcy judge overseeing the case.

Sources said Penney’s had been having a hard time lining up financing, mostly because lenders are looking for assets that can be used as collateral to ensure loan repayment. Given that inventory has been sitting idle in locked up stores, it’s proven difficult to assess the value of goods quickly going stale as seasons shift from the wintry weather of March when coronavirus shutdowns took hold to the warming temperatures now in May.

Lenders willing to provide debtor-in-possession financing could look to other assets such as intellectual property and real estate assets, or limit how much can be borrowed initially, using a wait-and-see approach to release additional amounts once certain metrics are met. While the former approach pushes all other creditors–such as vendors–down the food chain, the latter could hamstring a debtor’s ability to finance operations as it tries to make decisions that will allow it to continue in operation.

Sources didn’t identify who the potential investors are, but private equity firms are a likely bet given their appetite for a cheap deal.

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