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The Plano, Texas-based retailer skipped a $12 million interest payment on April 15, starting the clock on a 30-day grace period that could force it to file for bankruptcy as soon as May 15.
If J.C. Penney hits the May 15 deadline, it could opt to make the interest payment it owes, but the retailer skipped another $17 million payment Thursday night. The more money it has in bankruptcy, the more ability it has to execute its plan and survive.
J.C. Penney is negotiating with its first lien lenders, including H2 Capital, a “debtor in possession” loan of around to $300 million to $500 million, some of the people familiar with the matter said. It had originally hoped for as much as $1 billion in DIP, though that would have included existing debt being rolled over.
The company has also spoken to larger banks about bankruptcy financing, but DIP funds have been harder to come by than for other recent large-scale retail bankruptcies. While large banks contributed DIP to retailers like Toys R Us and Sears, they are less willing to extend such financing efforts now, particularly when they are not existing creditors, people familiar with the situation tell CNBC. As retailers from Macy’s to Nordstrom look to draw down their credit lines, banks must prioritize so that they are lending to those they are most confident can survive.
In its favor, J.C. Penney has an iconic brand and real estate throughout the country. It is buffered by $386 million of cash it had on hand as of February, as well as roughly $1.25 billion it drew from a credit line in March.
The size and nature of DIP financing that J.C. Penney is able to secure may set the tone for additional retail bankruptcies that are expected to come even as states begin to reopen their economies. Preppy retailer J. Crew and high-end department store Neiman Marcus filed for bankruptcy this week. Many more, including rural retail chain owner Stage Stores, are expected to follow suit.
The pandemic has put the value of assets that retailers have typically used as collateral for financing, such as inventory, into question. There is uncertainty about when stores will reopen to the public and how much stores will compete on discounts to lure back shoppers.
The people requested anonymity because the information is confidential. A spokesperson for J.C. Penney declined to comment.
Reuters first reported the DIP talks.
J.C. Penney had 846 department stores as of February and employed roughly 90,000 full-time and part-time employees. It reported $10.7 billion in net sales in fiscal 2019, down 8.1% from the year prior.
On Thursday, it announced it had “reaffirmed” its partnership with cosmetic chain Sephora, after the LMVH-backed company threatened to pull out of mini shops it had in 650 of J.C. Penney’s stores.
Questions about J.C. Penney’s value come just a few decades after the company made itself a name as the destination for the middle class to do aspirational shopping for clothes and appliances a suburban person of means might want. In 1994, it had roughly 250 stores and generated in $20.4 billion in retail sales, with net income nearing $1 billion.
But Walmart’s growth in 1990s threatened J.C. Penney’s hold on suburban and rural communities. The Great Recession and a failed attempt at a turnaround led by Bill Ackman left it in the hole. It still carries the burden of a $2.25 billion loan it took out to shore up JC Penney’s finances in 2013.
The company brought in Jill Soltau, former CEO of Jo-Ann Stores in October 2018. Soltau had begun to try to revitalize J.C. Penney and bring it back to its roots by focusing on customer service, apparel and low prices.
Under Soltau, the retailer has been slowly whittling its store base, including announcing the closure of six stores in January. Analysts, though, have said J.C. Penney needs to close hundreds of stores to get its business back in good shape.
— CNBC’s Lauren Thomas contributed to this report.