J.C Penney is moving forward with its debtor-in-possession financing.
During the course of a five-hour hearing on Thursday, the retailer’s $900 million DIP package got the green light from the Texas bankruptcy judge in the case. The retailer has said the DIP includes $450 million in new money, of which Thursday’s approval paves the way for the retailer to receive the first $225 million. The other half of the overall DIP would be used to pay its pre-petition secured debt.
“This is a positive 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, chief executive officer of J.C. Penney, said in a statement Thursday after the hearing.
J.C. Penney also signaled on Thursday that it is moving forward with its ongoing store reopening plan since the coronavirus pandemic temporarily shut its doors. The retailer, which has some 850 locations and 85,000 employees, has already reopened some 304 locations, and is opening an additional roughly 170 stores this week, its advisers said.
But the company also disclosed plans to close stores, starting with 154 locations. After a hearing on the closures that is scheduled for June 11, the company said it will start store closing sales at those locations, which it said would take 10 to 16 weeks. The company said it also expects “additional phases of store closing sales will begin in the coming weeks.”
“While closing stores is always an extremely difficult decision, our store optimization strategy is vital to ensuring we emerge from both Chapter 11 and the COVID-19 pandemic as a stronger retailer with greater financial flexibility to allow us to continue serving our loyal customers for decades to come,” Soltau said in a statement Thursday.
The DIP financing package had drawn objections from the unsecured creditors committee, which had argued that the terms give lenders too much leverage to potentially switch the case to a liquidation, or pursue some type of sale later in the case. The retailer has a July 15 deadline to firm up a business plan, or potentially switch to some sort of sale at that point.
The committee had argued also that the DIP involved liens on the retailer’s unencumbered property, including what it described as “hundreds of millions of dollars’ worth of real estate.” That potentially jeopardizes the retailer’s ability to repay its administrative creditors, who are providing goods and services during the bankruptcy and project to be owed “tens of millions of dollars,” the committee had argued.
U.S. bankruptcy judge David Jones acknowledged some of those concerns, but said Thursday that the retailer’s bankruptcy and DIP negotiations took place under the unusual strains of the coronavirus pandemic that shuttered stores for months.
“This is, if we were in a perfect world, this financing package would be highly objectionable,” he said at the hearing. “[But] I’ve been in enough of these cases. I will not let this case languish. I will not let it become bogged down in fights that fail to recognize the big picture, and what’s at stake.”
The DIP package, supported by J.C. Penney’s first lien lenders, on Thursday also got the support of a so-called crossholder lender group, which collectively holds roughly 16 percent of the retailer’s first lien loans. Those lenders agreed Thursday to participate in $53 million of the DIP that would be rolled up into paying the retailer’s secured pre-petition debt.
But the retailer’s future appears to be in the hands of its first lien lenders supporting its restructuring agreement, who together hold 73 percent of the retailer’s first lien debt. Those include the funds Ares, Brigade, H/2 Capital Partners, Silver Point, KKR, Sculptor Capital, Sixth Street Partners, White Box, Owl Creek and Apollo.
“These lenders are going to be accountable for the ultimate outcome in this case,” Joshua Sussberg of Kirkland & Ellis LLP, which represents J.C. Penney in the bankruptcy, said at the hearing.
“The sole path to preserving as many jobs as possible is this financing from our majority lenders, the structure we negotiated, and the chance to spend the next 45 days convincing those nine funds that it makes more sense to keep this company alive than liquidate it in pieces,” he said.
The company has roughly $559 million in its short-term investment account, but despite having that fairly substantial amount of cash on hand, it expects to burn through that cash in the coming weeks, according to testimony Thursday by James Mesterharm, a managing director at AlixPartners LLP, and restructuring adviser to J.C. Penney since March.
The company expects to be left with somewhere between $400 million to $500 million in cash on hand by that crucial mid-July deadline, in light of its running at a deficit.
The unsecured creditors were basically arguing for a plan to ensure that the administrative creditors get paid, even if at that point in July, the retailer is bound for some type of sale.
“The judge’s ruling was expected, especially in light of the choices he had in front of him,” Cathy Hershcopf of Cooley LLP, who represents the creditors committee, told WWD after the hearing.
“He could have at least thrown some shade on the debtors with respect to the issue of: are the administrative expenses going to be paid with the cash on hand, if there’s a toggle to a sale?” she said.
“My plea to the judge was, give a soft landing to the administrative creditors, should the dream not come true,” she said.