J.C. Penney Company, Inc. – 850-Store Retail Giant Files Chapter 11 as Grace Period for Missed Bond Payment Expires, Announces RSA with 70% Support of First Lien Lenders and $900mn of DIP Financing

[Developing Story] May 15, 2020 – J.C. Penney Company, Inc. and 17 affiliated Debtors (NYSE: JCP; “JCPenney” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-20182. The Debtors, one of the nation’s largest apparel and home retailers, are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Elllis LLP as general bankruptcy counsel, (ii) Lazard Frères & Co. LLC as financial advisors, (iii) AlixPartners LLP as restructuring advisor and (iv) Prime Clerk as claims agent. 

The Debtors’ lead petition notes more than 100,000 creditors, estimated assets of $8.6bn and estimated liabilities of $8.0bn (the Debtors' latest 10-K notes $3.758bn of long-term debt, see below). Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) Wilmington Trust Global Capital Markets (Trustee for $500.0mn Senior Notes), (ii) Wilmington Trust Global Capital Markets (Trustee for $388.3mn Senior Notes), (iii) Wilmington Trust Global Capital Markets (Trustee for $312.5mn Senior Notes), and (iv) Wilmington Trust Global Capital Markets (Trustee for $105.3mn Senior Notes) and (v) Nike Inc ($32.1mn trade claim). In a breathtaking list of trade-related debt, all 50 of the Debtors' top 50 unsecured creditors have claims in excess of $3.1mn.

On April 15th, the Debtors announced that they had elected not to make a $12.0mn interest payment due on April 15, 2020 in respect of their 6.375% Senior Notes due 2036 (the “2036 Senior Notes”) and that they would avail themselves of a 30-day grace period in order to "evaluate certain strategic alternatives" before determining whether or not to make that payment or face an event of default.

On May 7th, the Debtors made a similar announcement in respect of a $17.0mn interest payment due on their senior secured term loan credit facility (the “Term Loan Facility”). In that case, the Debtors had a five day grace period. On May 15th (ie today, the filing date), the Debtors announced that they had made that $17.0mn interest payment.

The Debtors chose, however, not to make the interest payment due today in respect of the 2036 Senior Notes. The result is that we have an interest payment made in respect of senior debt, the holders of which are signatories to the RSA; and a decision (undoubtedly made in consultation with signatories to the RSA) not to make a payment in respect of the subordinated notes, the holders of which are not signatories to RSA. Given that the Debtors intend to shed "several billion dollars of indebtedness," ie more than is owed in respect of first lien debt; battle lines have just been drawn, pitting holders of that first lien debt against noteholders, trade creditors and landlords.

In a press release announcing the filing, the JCPenney advised that "it has entered into a restructuring support agreement (the 'RSA') with lenders holding approximately 70% of JCPenney’s first lien debt to reduce the Company’s outstanding indebtedness and strengthen its financial position. The RSA contemplates agreed-upon terms for a pre-arranged financial restructuring plan (the 'Plan') that is expected to reduce several billion dollars of indebtedness, provide increased financial flexibility to help navigate through the Coronavirus (COVID-19) pandemic, and better position JCPenney for the long-term.”

Jill Soltau, the Debtors' Chief Executive Officer commented: "Until this pandemic struck, we had made significant progress rebuilding our company under our Plan for Renewal strategy – and our efforts had already begun to pay off. While we had been working in parallel on options to strengthen our balance sheet and extend our financial runway, the closure of our stores due to the pandemic necessitated a more fulsome review to include the elimination of outstanding debt.”

Store "Optimization"

The Debtors provide: "Implementing the financial restructuring will allow JCPenney to accelerate its store optimization strategy.  As part of its ongoing transformation, JCPenney will reduce its store footprint to better align its business with the current operating environment. Stores will close in phases throughout the Chapter 11 process – and the first phase of closures, including specific store details and timing, will be disclosed in the coming weeks."

DIP Financing

The Debtors press release notes: "JCPenney has received commitments for $900 million in debtor-in-possession ('DIP') financing from its existing first lien lenders, which includes $450 million of new money. Following Court approval, this financing, combined with cash flow generated by the Company’s ongoing operations, is expected to be sufficient to meet JCPenney’s operational and restructuring needs. As part of the DIP commitment from its existing lenders, JCPenney will explore additional opportunities to maximize value, including a third-party sale process."

Long-Term Debt

The Debtors most recent 10-K provides the following summary of long-term debt:

Significant Shareholders

• BlackRock, Inc.: 13.85%
• The Vanguard Group: 5.02%

About the Debtors

J. C. Penney Company, Inc. (NYSE: JCP), one of the nation’s largest apparel and home retailers, combines an expansive footprint of approximately 850 stores across the United States and Puerto Rico with a powerful e-commerce site, jcp.com, to deliver style and value for all hard-working American families. At every touchpoint, customers will discover stylish merchandise at incredible value from an extensive portfolio of private, exclusive and national brands. Reinforcing this shopping experience is the customer service and warrior spirit of nearly 85,000 associates across the globe, all driving toward the Company's mission to help customers find what they love for less time, money and effort.

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