J.C. Penney Creditors Tussle in Talks Over Need for Bankruptcy

(Bloomberg) -- J.C. Penney Co., its stores shut and revenue all but extinguished by the pandemic, is continuing to huddle with creditors about how to avert a default after it skipped an interest payment.

The struggling chain is seeking their agreement for a deal that would keep it out of bankruptcy, according to people familiar with the negotiations. Management is using a 30-day grace period on the missed $12 million payment as those talks to continue, said the people, who asked not to be named discussing confidential information.

The talks have exposed a split among the various constituencies about the chain’s fate. Some groups favor a restructuring out of court, while some of the highest-ranked creditors are pushing for a bankruptcy and liquidation, the people said. Notwithstanding that faction’s desire, liquidating the retailer is not currently on the table as part of the negotiations, the people said.

J.C. Penney, led by Chief Executive Officer Jill Soltau, has said it’s considering all options now that the retail shutdown caused by the coronavirus outbreak has upended her plans for a comeback year. Those alternatives could include filing for bankruptcy, as Reuters reported Tuesday. Such a move would put 90,000 jobs at risk.

Debt Burden

The company “has been engaged in discussions with its lenders since mid-2019 to evaluate options to strengthen its balance sheet, a process that has become even more important as our stores have also closed due to the pandemic,” it said in a statement Wednesday. A representative declined to comment further on Thursday about the negotiations.

“We think it is improbable that bond or loan holders reach a meaningful agreement to avert a filing in 30 days, and we expect the general tone around discretionary retailing to darken in the coming months,” CreditSights analysts wrote in a note Thursday. Their “base assumption” is that the company will sell assets rather than reorganize, and they calculated J.C. Penney has about four to six months of life left if it doesn’t seek bankruptcy soon.

Going bankrupt and trying to reorganize during a quarantine could be disastrous for retailers, with stores shuttered and revenue slowed to a trickle. But liquidation could be equally problematic, because it’s impossible to hold going-out-of-business sales if the chain is shut down, potentially leaving even less money for creditors. For now, J.C. Penney has enough cash to maintain itself and avoid a precipitous bankruptcy filing, the people said.

Among retailers weighing bankruptcy, “there could be merit in doing a pre-arranged bankruptcy now while stores are closed” and expenses are lower, said Derek Pitts, head of restructuring at investment bank PJ Solomon Securities LLC, who isn’t involved in the J.C. Penney negotiations.

J.C. Penney paid April rent for all its stores, even as other retailers stiffed their landlords. The chain has nearly 850 stores that have now all gone dark in response to the coronavirus pandemic, and there is no set date for them to reopen.

J.C. Penney tapped the restructuring consulting firm AlixPartners LLP, Bloomberg reported this week, adding to a roster that also includes Kirkland & Ellis LLP and Lazard Ltd. The retailer also furloughed the majority of its hourly staff. Kirkland and Lazard didn’t immediately respond to messages seeking comment.

A group of the company’s first-lien creditors are organized with White & Case LLC and Houlihan Lokey Inc., while a cross-over group of first-lien and second-lien creditors are working with Stroock & Stroock & Lavan LLP and Evercore Inc., the people said. Unsecured creditors are organized with GLC Advisors & Co., Bloomberg previously reported.

Representatives for Houlihan Lokey and Evercore declined to comment, while the other firms didn’t immediately respond to a request for comment.

The shutdown of the stores makes it impossible for Soltau to act on her turnaround plan for J.C. Penney, which had reported eight straight quarters of falling revenue. Department stores are struggling to adapt to a broad change in consumer preferences -- a trend that will likely be exacerbated by the pandemic.

Fitch Ratings said in a recent credit downgrade that J.C. Penney’s revenue could slide more than 25% in 2020. Still, even if U.S. department stores like J.C. Penney stay closed all year, they will have “ample liquidity to carry them through 2020,” according to a report from Bloomberg Intelligence.

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