- J.C. Penney is in talks with its first lien lenders to secure $450 million in financing for a possible bankruptcy that would require the troubled retailer to hit certain goals to receive the second half of it, people familiar with the situation tell CNBC.
- According to one option being discussed, J.C. Penney would be able to draw $225 million on day one, and then have to hit certain milestones in order to obtain the second half of the loan.
- The structure, while not rare, helps protect J.C Penney's lenders if the business falls apart this summer, because shoppers don't show up, the coronavirus returns, or both.
J.C. Penney is in talks with key lenders to secure $450 million in financing for a possible bankruptcy filing that would require the troubled retailer to hit certain goals to receive the second half of the loan, people familiar with the situation tell CNBC.
The funds, known as a "debtor in possession" loan, would be smaller than the $1 billion in DIP the retailer was initially seeking, though that would have included existing debt being rolled over.
The company is planning to file for bankruptcy as soon as Friday, though that timing could still be delayed, one of the people said. It is working on a plan that would contemplate closing 180 to 200 stores while in bankruptcy. The retailer had 846 department stores as of February and employed roughly 90,000 full-time and part-time employees. The people cautioned that plans are not yet finalized, and nothing is certain.
As part of the discussions with its first-lien lenders, J.C. Penney would be able to draw $225 million of its bankruptcy loan on day one. It will receive the rest of the funds based on how the company does against its budget, the terms of which its lenders are still working through. The structure helps protect J.C Penney's lenders if the business falls short, because shoppers don't show up, the coronavirus returns, or both.
The U.S. economy is facing structural uncertainty as states look to reopen businesses, but the coronavirus continues to spread. White House health advisor Dr. Anthony Fauci warned Tuesday that the United States could face even more "suffering and death" from Covid-19 if some states rush to reopen businesses too early.
For retailers, there is also uncertainty as to whether -- and how -- shoppers will want to visit their stores.
For those planning bankruptcy, those questions have added complexity as they negotiate loans with their lenders to help finance operations under court protection.
"Even if companies were to open their stores tomorrow – there's probably some parts of the economy that will never be the same," said Russell Mills, a bankruptcy attorney at law firm Bell Nunnally.
"In bankruptcy, you have to be able to forecast your revenues over a period of time – how can any debtor forecast with any certainty what their revenue is going to be for three to five years."
Discount department store Stage Stores filed for bankruptcy Monday after the coronavirus pandemic left it "unable to obtain necessary financing." It plans on liquidating inventory in hundreds of its stores, a task made difficult, it said in court filings, by the current environment.
"The Debtors cannot initiate store-closing efforts until their stores reopen following the COVID-19 pandemic. And even after they can reopen, predicting consumer demand at that time is challenging," the filing stated.
Neiman Marcus, meantime, filed for bankruptcy last week with $675 million in financing and a commitment from its creditors to provide $750 million once it emerges.
The people requested anonymity because the information is confidential. A spokesperson for J.C. Penney declined to comment.