A J.C. Penney mall store.

J.C. Penney Co. Inc. is on a tricky but resolute path to rebirth, its attorneys told a bankruptcy court in Texas, at an unusual hearing that took place on Saturday. 

That the retailer was able to enter the proceedings on Friday with a restructuring plan supported by lenders of 70 percent of its first lien debt demonstrates its staying power and its lenders’ faith in its survival through the coronavirus pandemic, Joshua Sussberg of Kirkland & Ellis LLP, an attorney for J.C. Penney, told U.S. Bankruptcy Judge David Jones at a remote hearing that had more than 300 listeners call in.

On Saturday, the company’s advisers laid the foundation for their proposed restructuring agreement that they said would result in a much-needed “substantial deleveraging,” and offered more detail on how it would work. For one, the plan would facilitate a reorganization that would separate J.C Penney’s operating assets and its real estate assets, Sussberg said. 

The company also plans to form a public real estate investment trust that would own properties, he said, and pointed out that J.C. Penney has “significant unencumbered real property” that it values to be worth up to $1.4 billion. 

The restructuring agreement also envisions the possibility of a sale, for which there is “robust interest” from third parties, said Sussberg, though he didn’t name any potential buyers. 

“That restructuring support agreement provides the foundation for our path forward, and the hopeful going concern of J.C. Penney,” he said at the hearing. 

“There are third parties interested in investing — and in buying this business,” he said. 

The company’s existing first lien lenders also support its proposed debtor-in-possession financing package, which Sussberg described as a $900 million facility, of which he said half would be used to pay off the retailer’s pre-petition secured debt, while the other half would be new money that would go into the business.

The first $225 million of that new money financing would become available when the court grants its initial approval, after a hearing on the DIP that is scheduled to take place in early June, he said, while the other $225 million would become available in two months. But in the meantime, the company has also already paid a 10 percent commitment fee, he said. 

The DIP proposal is all but certain to face opposition when the court considers it next month. On Saturday, an attorney for another lender group, Kris Hansen of Stroock & Stroock & Lavan LLP,  argued that his clients had been “disenfranchised” in the discussions. Hansen said also that in the week leading up to the bankruptcy, the company had spent about $72 million, including $10 million in payments to the retailer’s senior executives, as well as $45 million in commitment fees on the DIP. 

“It’s been an unfair process to those lenders who are not on the inside of the other group, and candidly, when we get to the DIP in June, you will see more closely that it is an exclusionary DIP,” Hansen said at the hearing. 

J.C. Penney’s financial struggles were documented before the coronavirus pandemic, with the company facing down competition not only from other traditional retailers including Kohl’s, Macy’s, Walmart, Target and fast-fashion counterparts, but also newer contenders like Amazon.

The leadership upheavals that the company went through since the early Aughts led to “false starts” and “dislocation,” said Sussberg, who noted that Jill Soltau, the retailer’s current chief executive officer since 2018, is its fourth ceo in seven years.  

Nonetheless, J.C. Penney’s advisers have sought to reinforce the retailer’s status as an American retail mainstay, describing it as an irreplaceable institution that survived more than a century that saw the Great Depression and World War II, and has since grown to encompass 846 stores and employ some 85,000 associates.  

But that narrative of endurance clashes with the reality of a company whose stock has plummeted, leaving its shareholders, including its former associates, questioning what they will be left with. J.C. Penney’s stock drops have led to the prospect of being delisted on the New York Stock Exchange, which requires companies to have an average closing share price of at least $1 over 30 days. Its stock price is about 24 cents a share.

At Saturday’s hearing, Sussberg said the company is “in constant communication” with the stock exchange and the U.S. Securities and Exchange Commission, and that it will make an announcement when it learns whether it will be de-listed. 

“Whether or not the company is ultimately de-listed is a decision that is out of our hands,” he said at the hearing on Saturday. 

In the company’s telling of the events leading to its bankruptcy, the retailer was in resurgence mode until it was derailed by the pandemic. Government-mandated store closures since March to rein in the spread of COVID-19 all but obliterated store sales, the company said in court filings, and caused the retailer to draw down its revolver of $1.2 billion, delay payments to vendors and furlough 77,000 employees, roughly 92 percent of its staff.   

“This is absolutely about the coronavirus, this is about a governmental shutdown, and it’s about us all being on video chat for this hearing,” Sussberg told the court on Saturday. “There is no question that life as we know it came to a pause, and as a result, this company’s liability management efforts, and all the discussions we had were no longer fruitful even considering.

“That revolver draw, which we have been using to fund operations, is resulting in an excessive cash burn, and the company simply cannot afford to live without a formal restructuring,” he said. 

At the same time, in the hearing as well as in court filings, its advisers also alluded to the effect of its leverage and “burdensome capital structure.” As of its bankruptcy filing, the company had roughly $4.9 billion in debt, including about $1.2 billion on its ABL facility as well as $1.5 billion in term loans, and $500 million on its first lien notes. 

On Saturday, the retailer’s attorneys sought approval for the company to access its roughly $475 million in cash collateral, which they argued it needs to fund operations during the bankruptcy and pay its employees. Jones granted interim approval to that motion, and also signed off on a number of other customary first day bankruptcy motions by the retailer, including to pay taxes and wages. 

Access to the cash will be especially important in light of the ongoing stores closures and decline in sales, and “tightening trade credit” by its vendors, according to a declaration filed on Friday by James Mesterharm, a managing director at AlixPartners LLP, and restructuring adviser to J.C. Penney since March. 

There is also the question of the impact of the pandemic on inventory values, the subject of much consternation among retailers trying to fund their bankruptcies while their products languish on store shelves. So far, J.C. Penney said that a “recent appraisal” of its inventory had led to a $71 million cut in its borrowing based by its ABL lenders. 

“Based on my experience generally and my experience with the debtors in particular, approval of the use of cash collateral during the interim period is critical to the debtors’ ability to continue operating and restructure successfully,” Mesterharm said in his declaration. 

“Without it, the debtors may have to pursue a liquidation in short order, to the detriment of their creditors and estates,” he wrote.