J.C. Penney Company, Inc. – Creditors Committee Objects to Proposed DIP Financing, Saving Special Wrath for Gratuitous $225mn Roll-Up; Advocates Alternative DIP Financing Proposed by Ad Hoc Group of Lenders

June 2, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' request to access $900.0mn of debtor-in-possession (“DIP”) financing saving particular wrath for a roll-up of $225.0mn of prepetition debt that further protects DIP lenders, impairing previously unencumbered assets that are worth "hundreds of millions of dollars" at the expense of administrative and general unsecured claims holders. Any further encumberance of the Debtors' assets, the Committee argues, should be limited to securing new money loans, this particularly appropriate given that the "DIP Lenders are already receiving significant consideration for the new money they are providing in the form of high fees, the payment of expenses, an inflated interest rate, and control over these cases as mandated by the RSA milestones."

All of these gifts, the Committee continues, are representative of a very poor bit of deal-making on the part of the Debtors and investment bankers Lazard Freres; leaving the Debtors with inadequate committed funding and without sufficient control over their own Plan; the DIP lenders in a position to withhold the next $225.0mn tranche of DIP funding and unilaterally require that the Debtors toggle to a "full-chain liquidation." 

The Committee's objection also points the Court in the direction of what they argue is a legitimate and vastly preferable source of DIP financing which is now being offered by an ad hoc group of lenders "which does not…propose to roll-up prepetition amounts, offers a lower rate, provides more liquidity with the initial draw, and commits to converting outstanding amounts into exit loans, all while foregoing the upfront fees the DIP Lenders have already received with respect to the currently proposed facility. The alternative proposal highlights everything that is distasteful about the DIP Facility, most offensively, the dollar-for-dollar roll-up that diverts hundreds of millions of dollars away from the Debtors and into the pockets of the Consenting First Lien Lenders.”

The Committee’s objection states, “The Committee understands the Debtors’ need for post-petition financing in these cases and supports a facility that provides the estates with a bridge to a plan, without unduly prejudicing the rights of unsecured creditors. This DIP Facility, however, falls far short of that goal. Importantly, the DIP Facility provides less than $160 million of liquidity now and no guarantee of additional funds in mid-July, and allows the DIP Lenders, unilaterally, to abandon the plan process in favor of a full-chain liquidation or other sale process in six weeks’ time. In exchange for this limited funding and the lender-option to pursue confirmation of a plan of reorganization, the DIP Lenders require a dollar-for-dollar roll-up of no less than $225 million of existing loans secured by new liens on the unencumbered property of these estates – including, at a minimum, hundreds of millions of dollars’ worth of real estate  which would otherwise remain available to satisfy the tens of millions of dollars of administrative expenses which are expected to accrue and remain unpaid during the first few months of these cases. Together with the adequate protection liens proposed to be granted to the Debtors’ prepetition lenders on account of this inflated priming facility and other value minimizing protections, the proposed impairment to the Debtors’ previously unencumbered assets threatens to destroy any prospect of recovery to unsecured and administrative creditors. 

The DIP Facility is divided into two tranches, the second of which is entirely optional. After providing an initial $225 million, the DIP Lenders may simply refuse to loan any additional amounts on July 15th if a majority of the Consenting First Lien Lenders and 66.7% of the DIP Lenders do not approve a go-forward Business Plan. Granting this right to the DIP Lenders today rather than on July 15th undermines the Debtors’ business judgment and the role of this Court to decide whether a full-scale liquidation of the Debtors’ assets just six weeks from now is in the best interest of the Debtors’ estates. For the privilege of underwriting this riskless option, the DIP Lenders have demanded an unreasonable amount of consideration: (i) $45 million in fees that were paid prior to the Petition Date; (ii) an additional $27 million in exit fees; (iii) an enhanced interest rate that is nearly double that of the prepetition Term Loan facility; and (iv) cross-collateralization of the rolled-up debt that would leave these estates with little to no unencumbered assets.

The Debtors are currently seeking to defer no less than $34 million in post-petition rent, have not yet paid stub rent [see also our story on May 29th objection of numerous landlords which dovetails with the Committee's arguments in this paragraph, Docket No. 357] are incurring post-petition obligations to various trade vendors, and have not yet satisfied claims arising from section 503(b)(9) of the Bankruptcy Code and other post-petition obligations likely to arise in these cases. Without additional funding in mid-July or the ability to use the proceeds of their previously unencumbered real estate to generate value, the estates may not possess the ability to satisfy the administrative obligations accruing to (i) employees, who are the life blood of the Company, (ii) vendors, many of whom are shipping goods to the Debtors on terms, and (iii) landlords, who are being forced to defer rent. And as a result of the section 506(c) waiver, the estates would lack the recourse to recoup these expenses, which this Court is allowing the Debtors to incur to enhance secured creditor returns. Such a result would amount to a disaster for these estates… Recognizing the inherent unfairness of the DIP Facility, an ad hoc group of lenders has provided an alternative proposal, which does not include many of the objectionable terms detailed herein. Unlike the DIP Facility, this proposal does not propose to roll-up prepetition amounts, offers a lower rate, provides more liquidity with the initial draw, and commits to converting outstanding amounts into exit loans, all while foregoing the upfront fees the DIP Lenders have already received with respect to the currently proposed facility. The alternative proposal highlights everything that is distasteful about the DIP Facility, most offensively, the dollar-for-dollar roll-up that diverts hundreds of millions of dollars away from the Debtors and into the pockets of the Consenting First Lien Lenders.”

The objection continues, “Roll-ups are not favored because they provide little or no economic benefit to the debtor and solely benefit the prepetition lender by circumventing the Bankruptcy Code’s priorities and distribution framework… While the Committee does not oppose the proposed Roll-Up per se, it does object to the granting of new liens on unencumbered assets for anything more than new money loans. There is no sound business justification for the Roll-Up to be collateralized by previously unencumbered assets when the DIP Lenders are already receiving significant consideration for the new money they are providing in the form of high fees, the payment of expenses, an inflated interest rate, and control over these cases as mandated by the RSA milestones. The inherent excessiveness of the Roll-Up was recognized by the Ad Hoc Crossover Group, which did not include it in their alternative proposal. Indeed, approval of the cross-collateralization of the Roll-Up would unduly benefit the Prepetition Secured Parties while stripping these estates of valuable assets which should be reserved for the payment of administrative claims and unsecured claims given the uncertain future of these cases… In addition to granting the ABL Lenders the adequate protection… the Debtors also propose to pay the ABL Lenders a weekly $500,000 consent fee until all ABL Obligations are repaid in full. This fee is unnecessary to adequately protect the ABL Lenders, who possess an equity cushion in their prepetition collateral, and are already being provided additional protections.”

Further Background

Proposed DIP Financing

May 16, 2020 – The Debtors filed a motion requesting Court authority to (i) access $900.0mn of debtor-in-possession (“DIP”) financing and (ii) use cash collateral  [Docket No. 38]. Also on May 16th, the Court issued an interim order approving the $500.0mn cash collateral ask in the Debtors' DIP motion [Docket No. 108].

The DIP financing is comprised of (i) $450.0mn in new money commitments to be provided by existing first lien lenders and (ii) a $450.0mn roll-up of prepetition term loans; with the new money commitments to be provided in two tranches of $225.0mn upon issuance of interim and final DIP orders (the latter expected to be July 15th).

TThe Debtors' DIP motion states: “Immediate access to Cash Collateral is critical to the Debtors’ restructuring efforts. Nearly all $500 million of the Debtors’ cash on hand is Cash Collateral and is necessary to pay nearly 85,000 associates, restock stores with merchandise, maintain operations, and administer these chapter 11 cases as the Debtors look forward to reopening stores and emerging from the 'cash preservation mode' implemented in light of the coronavirus pandemic. This cash preservation mode involved several measures to pause outflows and protect the Debtors. First, the Debtors drew down $1.25 billion on their ABL Facility. Second, they paused all hiring, cut spending, reduced receipts of merchandising goods, and suspended all merit pay increases for 2020. Third, they extended payment terms with their vendors. Fourth, the Debtors made the incredibly difficult decision to implement both partial and full furloughs that have affected nearly all of the Debtors’ employees. Fifth, the Debtors did not pay the majority of May rent on account of temporary store closures. These difficult but necessary measures not only shielded the Debtors from immediate danger, but enabled the Debtors to enter chapter 11 with sufficient liquidity to responsibly operate and maintain their businesses for the first few weeks of the cases.

As the Debtors look forward to reopening more stores in the coming weeks and months, their need for additional liquidity will grow. The Debtors’ businesses are capital intensive and require constantly bringing in fresh inventory to stock their shelves, both online and in stores. To that end, the Debtors have negotiated for $450 million in new liquidity through the DIP Facility to help finance operations and create a bridge as the Debtors pursue the restructuring embodied in the RSA… ”

Key Terms of the DIP Facility

• Borrower: J. C. Penney Corporation, Inc. (the “DIP Borrower”).
• Guarantors: J. C. Penney Company, Inc. and each its subsidiaries that are Debtors other than the Borrower.
• DIP Lenders: Those DIP Lenders identified on Schedule 1 to the DIP Term Sheet attached to the DIP Commitment Letter attached as Exhibit A.
• DIP Agent: GLAS USA, LLC.
• DIP Commitments: An aggregate principal amount of $450.0mn in new money commitments and a $450.0mn roll-up of the Term Loans, to be funded in multiple borrowings as follows: (a) up to $225 million made not later than one business day following the entry of the DIP Order (as defined below) (the “Initial Borrowing”), and (b) the remainder of the Total Aggregate Commitment in an aggregate principal amount equal to $225 million (the “Subsequent Borrowing”) made available following the entry of the DIP Order on July 15, 2020, subject to satisfaction of the Conditions Precedent to Initial Borrowing and the Conditions Precedent to the Subsequent Borrowing.
• Interest Rate: Loans under the DIP Facility will bear interest at a rate, at the DIP Borrower’s option, equal to the Base Rate plus 10.75% per annum or LIBOR (subject to a 1.25% floor) plus 11.75% per annum, compounded monthly and payable monthly in cash in arrears. At any time when an Event of Default under the DIP Facility has occurred and is continuing, all outstanding amounts under the DIP Facility shall bear interest, to the fullest extent permitted by law, at the interest rate applicable to base rate loans plus 2.00% per annum and shall be payable on demand in cash (the “Default Rate”). Interest on overdue amounts under the DIP Facility shall also accrue at the Default Rate and shall be payable in cash.
• Fees and Expenses: 
  • Commitment Premium: 6.00% of each DIP Lender’s initial commitments in respect of the $450 million “new money” portion of the DIP Facility.
  • Upfront Premium: 4.00% of each DIP Lender’s commitments in respect of the $450 million “new money” portion of the DIP Facility on the Petition Date, which shall be earned, due and payable upon execution of the Commitment Letter.
  • Exit Premium: 3.00% of each DIP Lender’s funded Loans or unfunded commitments under the DIP Facility (including the “new money” and rolled up portion of the DIP Facility) on the Maturity Date or on the date of any earlier voluntary or mandatory prepayment (the “Exit Premium”)
• Roll Up: On the date of entry of the Final Order approving the DIP Facility, $225 million in principal amount of the Prepetition Term Loans held by the DIP Lenders (or their applicable designees) shall be rolled up into the DIP Facility in accordance with each such Prepetition Term Loan Lender’s share of the DIP Facility. On the date the Subsequent Borrowing, a corresponding amount of principal amount of the Prepetition Term Loans held by the DIP Lenders (not to exceed an additional $225 million in the aggregate) shall be rolled up into the DIP Facility on a dollar-for-dollar basis in accordance with each such Prepetition Term Loan Lender’s share of the DIP Facility.
• Maturity Date: The DIP Facility will mature on the earliest of (such earliest date, the “Maturity Date”):

1. the date that is 180 days after the Petition Date (the “Scheduled Maturity Date”);
2. 20 days after the Petition Date, if the DIP Order (as defined below) has not been entered by the Bankruptcy Court prior to the expiration of such 20-day period;
3. the effective date of a plan of reorganization or liquidation in the Chapter 11 Cases;
4. the consummation of a sale of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code or otherwise;
5. without the DIP Agent’s prior written consent, the date of filing or express written support by the Debtors of bidding procedures, sale processes, transactions, plans of liquidation or reorganization or related disclosure statements that are not in accordance with the RSA, if applicable, and that are not otherwise acceptable to the DIP Lenders;
6. the date of termination of the DIP Lenders’ commitments and the acceleration of any outstanding Loans, in each case, under the DIP Facility in accordance with the terms of the DIP Facility credit agreement (the “DIP Credit Agreement”) and the other definitive documentation with respect to the DIP Facility (collectively with the DIP Credit Agreement and the related security documents, the “DIP Documents”);
7. any breach by the Debtors which has not been cured or waived or termination of the RSA after the effectiveness thereof;
8. dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code;
9. the Debtors shall lose access to the use of cash collateral in accordance with the Cash Collateral Order (as defined below), subject to any applicable remedies notice period; and
10. other customary circumstances to be mutually agreed.

Long-Term Debt

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

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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