JCP J C Penney Company Inc

By Andrew Scurria, Suzanne Kapner and Alexander Gladstone 

J.C. Penney Co., battered by missteps and the rise of e-commerce, is on the verge of being done in by the coronavirus.

With nonessential shopping largely shut down across the U.S., the department-store chain is in advanced talks with bank lenders for a bankruptcy loan as large as $1 billion to carry it through a potential chapter 11 process, The Wall Street Journal reported Thursday.

The store shutdowns have choked off revenue, putting more pressure on the company's lopsided balance sheet. After years of falling sales, red ink and failed turnaround efforts, the coronavirus pandemic is hastening a reckoning with creditors over Penney's $3.7 billion in debt.

The company has said in private negotiations it wants to reorganize as a viable business and has proposed handing control to lenders, according to people familiar with the matter.

But saving a retail chain with a business model in decline is difficult, even under normal economic conditions. Retailers have difficulty shrinking themselves back to health, according to analysts, and are more likely than other types of companies to simply liquidate through bankruptcy instead of getting back to business.

"The answer doesn't lie in massive store closings," said Steve Dennis, president of SageBerry Consulting. "If your fundamental issue is you aren't relevant with customers, having fewer stores doesn't solve that problem."

Along with Sears Holdings Corp., Penney for decades was a one-stop shop for millions of middle-class American families. Filing for chapter 11 puts the company at risk of shutting down permanently, given the experience of other brick-and-mortar retailers. While U.S. bankruptcy laws are designed to save indebted companies, nearly half of the more than 50 retailers and supermarkets that have filed for chapter 11 over the past 15 years closed all their stores and went out of business for good, according to Fitch Ratings research.

They include Toys "R" Us Inc. and Barneys New York Inc., which both filed for chapter 11 hoping to reorganize but wound up in liquidation. A Penney spokeswoman said liquidation isn't being considered but couldn't comment on what a potential deal might look like.

Retailers filing for bankruptcy during the pandemic will face even more challenges. Chains typically use the bankruptcy process to close laggard stores. The merchandise in those stores is then sold in going-out-of-business sales, which helps provide cash to fund creditors and continuing operations.

With stores closed, retailers can't run those sales. As the inventory ages, it loses value.

"Cash from those sales is important for paying down debt and funding operations going forward," said Michael Kollender, head of consumer and retail investment banking at Stifel Financial Corp.

Penney chose not to make an interest payment due April 15 as a result of store closures caused by the pandemic and to take advantage of a 30-day grace period to continue talks with creditors, the spokeswoman said.

The company could theoretically cover the missed payment to avoid the need for a chapter 11 filing when the 30-day grace period runs out. Often companies that skip debt payments don't make them up and instead enter bankruptcy.

A chapter 11 filing, which could come in the next several weeks, would leave bankruptcy lenders firmly in control of the company's fate, people familiar with the matter said. For retailers, the loans they borrow to stay afloat during chapter 11 typically come with requirements that pressure management to quickly decide which stores, if any, will be kept open.

Bankruptcy loans also include financial covenants that, if tripped, can trigger a default and put the company on a quick path to liquidation. In the bankruptcies of Toys "R" Us and Barneys, lenders kept the companies on a tight leash that put a successful reorganization out of reach.

Companies can be reluctant to file for bankruptcy if they still have significant worth to stockholders. But Penney has little equity value left. Its shares, which trade well below $1, are at risk of being delisted from the New York Stock Exchange.

Penney's failure to pay in mid-April surprised some investors, given that it paid rent on April 1 when other large retailers such as Staples Inc. and Ross Stores Inc. skipped their payments to landlords and other companies are seeking long-term rent relief.

Of Penney's creditors, top lenders have the most to gain in a bankruptcy, which would stop the company from spending cash by trying to turn around the business, or from making payments to unsecured bondholders and other lower-ranking creditors.

In addition to the banks arranging bankruptcy financing, top lenders include Sixth Street Partners and the credit-investing arms of KKR & Co. and Apollo Global Management Inc., as well as H/2 Capital Partners LLC, people familiar with the matter said.

These lenders would get first crack at the proceeds from closing down stores and selling inventory and real estate once stay-at-home mandates are loosened. Penney is continuing to evaluate all options, the spokeswoman said.

Some creditors have argued that Penney has enough cash and borrowing capacity to stay alive without resorting to chapter 11 until its stores can reopen, people familiar with the matter said. It owns about 230 stores that aren't encumbered by debt, according to Citigroup Inc. analyst Paul Lejuez.

Since missing the interest payment, Penney has turned down a $300 million financing proposal designed to avert a bankruptcy, saying the offer didn't help fix the company's debt problem and didn't provide enough liquidity, a person familiar with the matter said.

Department stores were struggling before the health pandemic. Sears filed for bankruptcy in 2018 and has continued to close stores and sell assets. Macy's Inc. plans to close 125 locations over the next three years. Kohl's Corp.'s sales fell for the most recent fiscal year, which ended Feb. 1. Neiman Marcus Group Inc. plans to file for bankruptcy in coming days after missing a debt payment, a person familiar with the matter said.

Penney's problems date back nearly a decade. It never regained its footing after a failed makeover by former Apple Inc. executive Ron Johnson did away with discounts and popular in-house brands. Former Home Depot Inc. executive Marvin Ellison, who is now CEO of Lowe's Cos., brought back appliances when he took the reins at Penney and lost focus on apparel, the chain's core business.

Jill Soltau, who has been CEO since 2018, has refocused on apparel but her plan to remake stores is running out of time as the pandemic cripples nonessential retailers.

"They lost their core customer and they have never been able to get her back," said Chuck Grom, an analyst with Gordon Haskett Research Advisors.

Write to Andrew Scurria at Andrew.Scurria@wsj.com, Suzanne Kapner at Suzanne.Kapner@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com

(END) Dow Jones Newswires

April 26, 2020 07:14 ET (11:14 GMT)

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