J.C. Penney Skips Interest Payment, Mulls Its Alternatives

(Bloomberg) -- J.C. Penney Co. is skipping an interest payment, putting the struggling retailer on the path toward a potential default on its debt.

The department store chain said it’s not paying $12 million due today on its 6.375% senior notes due 2036. Instead, it’s invoking a 30-day grace period, which keeps the missed payment from becoming a formal event of default, and evaluating strategic alternatives.

The company’s management is considering bankruptcy in addition to negotiating with creditors, Reuters reported Tuesday. J.C. Penney tapped the restructuring consulting firm AlixPartners LLP for advice on how to ease its $4 billion debt load amid shrinking revenue, Bloomberg reported this week.

The department store operator has been in conversations with its banks in recent weeks about its liquidity needs, and has been in on-and-off negotiations with lenders about a possible debt deal, Bloomberg reported.

J.C. Penney shares plunged as much as 37% on Wednesday. At 23 cents at 3:55 p.m. in New York trading, the stock’s value is about a fifth of what it was at the start of the year.

Rent Paid

The company paid April rent for all its stores, even as other retailers withheld payments. The J.C. Penney 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. The retailer also furloughed the majority of its hourly employees. Its worker count was 90,000 as of Feb. 1.

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,” J.C. Penney said on Wednesday.

Skipping payments on a bond to conserve cash often precedes a bankruptcy. A court filing becomes almost inevitable if the company doesn’t make good on the missed interest by the end of the grace period. At that point, creditors can begin seizing assets or take other actions that tip the company into bankruptcy.

Alternatively, the company can negotiate a deal with creditors during the grace period that gets done in or out of court. Either way, shareholders typically see their holdings wiped out or heavily diluted by such settlements.

Fitch Downgrade

J.C. Penney was recently downgraded by Fitch Ratings. The credit-rating company noted that revenue could decline over 25% in 2020. The company’s shares have also traded below $1 since January, putting them at risk of delisting with the New York Stock Exchange.

Before the coronavirus outbreak, the company had already reported eight straight quarters of contracting revenue as department stores struggle to adapt to a broad change in consumer preferences -- a trend that will likely be exacerbated by the coronavirus outbreak.

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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