These days whenever you hear about a credit extension, it's often a positive when a still tight-fisted lending industry is willing to give a hand to a struggling retail company like J.C. Penney (NYSE: JCP ) . However, some commentators may be reading too much into the company's recent financing victory. While the news is certainly not a bad sign, J.C. Penney is far from out of the woods just yet.
The new facility
On June 23, J.C. Penney announced that it had closed a $2.35 billion facility. Ed Record, CFO of J.C. Penney, stated that the company pursued this new facility "proactively." He implied that J.C. Penney didn't really need it and wasn't really reacting to any bad turn of events, but it wanted to grab the credit just in case.
The new facility extends the payback maturity by several years, gives J.C. Penney more flexibility in terms of liquidity by adding another $500 million in new credit, and lowers the interest expense by replacing $1.85 billion in previously incurred debt. Presumably lenders only offered better terms because J.C. Penney privately shared its current results and future outlook and they appeared promising to the lenders.
The monkey in the wrench
The lenders aren't really taking much of a risk here. The new facility is an "asset-based senior credit facility." That means in the event of default the creditors will get first dibs before most other creditors on J.C. Penney's assets. This includes inventory, real estate, cash, receivables, and just about anything that isn't nailed down or even is nailed down.
Furthermore, if J.C. Penney ultimately does file for bankruptcy, it means these guys likely get ownership rights that equal most of the principal and interest of the loans or maybe even much more. Sometimes companies file bankruptcy to reorganize, cancel their current common stock, and start over with the creditors becoming the new shareholders.
If this happens, J.C. Penney's will live on and the creditors can participate in any potential upside for the new, mostly debt-free company that will then become free of its past financial burdens. Record says that the new facility signals confidence in the company. I don't entirely disagree, but the lenders didn't stick their necks out as much as you might think.
Ho ho ho
This holiday season may just mark the make-or-break point for the J.C. Penney brand. It will be the first holiday quarter in which Mike Ullman, CEO of J.C. Penney, will face a comparison to a year-over-year quarter when he was in charge. This could be seen, perhaps, as the ultimate test of his management.
Right around now, big retailers like J.C. Penney are working around the clock to prepare for the holiday season in terms of merchandise selection, merchandise loading, marketing strategies, pricing strategies, logistics, advertising, displays, you name it. The timing of the new credit facility was probably no coincidence.
Do or die
Ullman seems quite confident. Last quarter, during the conference call he stated, "We're in the third and final stage, which we call the go-forward phase, during which we're positioning J.C. Penney for long-term, profitable growth." He kind of put himself out there. The month of April was mentioned as the first month in which J.C. Penney saw positive foot traffic in 30 months so maybe the company is on to something.
J.C. Penney seems to have taken a back-to-basics approach by using many of the same strategies that worked in recent years but that it has since abandoned. Does the company have an ace up its sleeve it plans to use? Record stated that the new liquidity will be helpful "particularly during periods of peak working capital needs." That period would probably be ahead of or during the holiday quarter. If J.C. Penney goes "all in" for that it could mean a big revival -- or the final blow.
It's always tempting to place a bet that a big household name will stage a dramatic recovery led by its hotshot CEO. As for me, I'd rather wait for more tangible evidence that J.C. Penney is back with a vengeance and then catch a late ride on that train as the risk is still too great for my tastes despite the new lending facility. It will be interesting to watch from the sidelines for now.
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