‘A path forward’: J.C. Penney’s bankruptcy judge approves USD 900 million lifeline

After five hours of testimony, the judge rejected an argument by creditors who considered the financing to be “predatory.”

By guest author Maria Halkias from Dallas News

U.S. Bankruptcy Court judge approved J.C. Penney’s $900 million financing package Thursday to fund its reorganisation after testimony that basically concluded that the retailer doesn’t have time for alternatives.

Following five hours of testimony that included the prospect of lawsuits and other delays, Judge David Jones said he had approved “more than financing. It is a path forward.”

Caption courtesy by Dallas News

Creditors had opposed the financing terms, which include an ability to convert the Plano-based department store chain’s reorganization into a liquidation by mid-July.

“In a perfect world, this financing package would be highly objectionable,” Jones said. “There’s a lot I don’t like, but I recognise that this investment may not be in a black hole. It’s a murky hole.”

Penney filed for bankruptcy in May with USD 900 million in financing lined up from H/2 Capital Partners and Silver Point Capital. But another lender group that includes Aurelius Capital Management, according to a report in the Wall Street Journal, has called that agreement “predatory” and received the backing of Penney’s unsecured creditors.

Penney’s restructuring adviser Jim Mesterharm, managing director at AlixPartners, testified Thursday, June 4, 2020, that without the new financing, Penney would run out of cash by the end of August.

Mesterharm, who was hired by Penney at the end of March to help the company determine its cash needs if it filed for bankruptcy, said Penney’s cash balance had increased to USD 559 million as of Tuesday as it reopened stores. But the retailer’s cash needs exceed what it can generate on its own.

The agreement provides Penney with USD 225 million immediately.

David Kurtz, global head of the restructuring practice at Lazard Ltd., testified that Penney would not have had to file for bankruptcy if not for the COVID-19 pandemic.

But nailing down sufficient financing after that was “by far the hardest” situation he had experienced, said Kurtz, who has been involved in some of the highest-profile retail bankruptcies, including RadioShack, J.Crew, Toys R Us, Gymboree and Neiman Marcus.

Potential lenders all recognized the circumstances of stores being closed and not knowing when they would reopen, and that stores would possibly close again due to a later coronavirus outbreak, Kurtz said. “No one had the crystal ball that would know the answers.”

It also was difficult to know the value of Penney’s real estate assets in a post-pandemic world, he said.

Initially there was high interest, Kurtz said. But after what he called a “robust process,” Penney’s existing lenders were the only ones who agreed to provide financing for the bankruptcy reorganization, which is referred to as debtor-in-possession financing.

Penney’s sales performance has been better than expected so far, but the company’s suppliers are apprehensive, Mesterharm said. One third of Penney’s top 100 suppliers, which make up about 80% of its merchandise inventory, have expressed concerns about being repaid.

“We haven’t received as much shipments as we expected,” he said.

Earlier in the hearing, a lawyer for unsecured creditors questioned the need for Penney to even file for bankruptcy.

Penney entered bankruptcy with USD 450 million in cash and up to $1 billion in real estate assets, said Cathy Hershcopf, an attorney for Penney’s unsecured creditors. She said approval of the financing agreement would take Penney’s fate out of the judge’s hands.

“On July 15, [debtor-in-possession] lenders will decide the fate of J.C. Penney and whether the dream lives or dies, whether there’s a reorganization plan or a liquidation,” Hershcopf said. “This court will be powerless to help J.C. Penney.”

A July 15 “toggle” event, built into the proposed lending, would automatically convert Penney into a liquidation. The agreement has another such trigger in August.

“We’re asking the court to protect the creditors, vendors and employees,” Hershcopf said. “We’ve seen this picture before.”

Penney’s attorney Joshua Sussberg said that while the alternative bid sounds better, the company’s bank — Wells Fargo, which holds a first lien on assets — wouldn’t approve it.

“We’d be embroiled in a nasty litigation and spend the next 45 days trying to keep the company alive,” Sussberg said.

The restructuring agreement had 73% approval of first lien lenders, he said.

Penney has 304 of its 846 stores open now and 171 more are expected to open within days, Sussberg said. E-commerce sales have been strong, up 23.5 % last week and up 15.7 % in May. Overall sales are down 32.9 % for stores that have reopened.

Among the group of stores open, 202 are in malls and 102 are in off-mall locations. The off-mall stores are performing slightly better, with sales down only 31.1 % vs. a decline of 34 % for mall stores, Sussberg said.

Penney was among the group of nonessential retailers that temporarily closed their stores in mid-March and started reopening in early May as stay-at-home orders were lifted. A few more stores are closed because of protests.

Penney is expected to permanently close more than 200 stores as part of its bankruptcy reorganisation.