It should come as no surprise that struggling retailer JCPenney, which has been burning cash at an unprecedented rate, and which just wasted two years of turnaround time following the sacking of its now former CEO Ron Johnson only to return to the same strategy that Bill Ackman blasted as recently as 2012, has been in dire cash straits. However, while everyone expected the company to announce that it would satisfy its immediate cash needs by drawing down in part or in whole on its recently amended and restated, and currently undrawn, $1,850 billion revolver with JPM as administrative agent (as every other company does when it needs a brief liquidity burst), nobody expected that JCP, whose stock yesterday hit a 12 year low, would be forced to hire Blackstone to advise in on raising cash. Which according to the WSJ it just did.
J.C. Penney Co. has hired bankers at Blackstone Group for advice on how the department-store chain can shore up its fast-eroding stockpile of cash, people familiar with the matter said Thursday.
The company is seeking to raise about $1 billion in cash, the people said. One option could be to sell a minority stake in Penney, and the company has reached out to possible investors including private equity firms, the people said. Other fundraising options on the table couldn’t immediately be determined.
Couple of observations here:
- Raising capital, i.e., selling equity in part or in whole, at a time when your stock is already plumbing “generational lows” is hardly confidence-inspiring. Those same investors who like JCP’s assets and are given the option to buy it directly or indirectly at $14, can just wait a few short months and buy those same assets in a stalking horse bid following a bankruptcy filing.
- The cheapest, and readily available, capital available to the company is its revolving credit facility. According to its 10K, there were no borrowings as of February 2 (aside for $281 million in standby L/Cs) on its recently amended revolver which has a total size of $1.85 billion. That the company is avoiding this option is the biggest red flag (more on this below).
- Why hire Blackstone and not Goldman which has by far the deepest rolodex of potentially interested investors and which can onboard any exposure on its balance sheet, if only briefly before its “structures” it away? Because Blackstone, while masking as an investment bank, really has one of the best restructuring teams in the industry. it is best to be prepared to go straight to Plan B if and when the above capital raising fails. At least people within Blackstone will be intimately familiar with JCP’s data which can be ported from its banking group straight to its restructuring and reorganization group.
- How will JCP’s vendors react when the realize that the firm is suddenly facing a liquidity crunch? The firm had $2.5 billion in assorted accounts payable. What happens now that vendors just say no to T+30/60/90 terms, demand immediate repayment or else no more product is shipped and going forward switch strictly to advance payment and Cash on Delivery terms? Because they know very well that the last payable in will be merely a claim in an eventual bankruptcy filing, likely getting pennies on the dollar. In other words, suddenly JCP’s $2.5 billion in Payables has become a huge liability, one which will be a massive drain of cash in the coming days and weeks.
Another quick look at the credit facility. From the 10-K
On January 27, 2012, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation entered into a revolving credit facility in the amount up to $1,250 million (2012 Credit Facility), which amended and restated the Company’s prior credit agreement entered into in April 2011, with the same syndicate of lenders under the previous agreement, with JPMorgan Chase Bank, N.A., as administrative agent. The 2012 Credit Facility matures on April 29, 2016. On February 10, 2012, we increased the size of our 2012 Credit Facility to $1,500 million and on January 31, 2013, we increased our 2012 Credit Facility by an additional $250 million to $1,750 million.
The 2012 Credit Facility is an asset-based revolving credit facility and is secured by a perfected first-priority security interest in substantially all of our eligible credit card receivables, accounts receivable and inventory. The 2012 Credit Facility is available for general corporate purposes, including the issuance of letters of credit. Pricing under the 2012 Credit Facility is tiered based on JCP’s senior unsecured long-term credit ratings issued by Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services. JCP’s obligations under the 2012 Credit Facility are guaranteed by J. C. Penney Company, Inc.
Availability under the 2012 Credit Facility is limited to a borrowing base which allows us to borrow up to 85% of eligible accounts receivable, plus 90% of eligible credit card receivables, plus 85% of the liquidation value of our inventory, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value. In the event that availability under the 2012 Credit Facility is at any time less than the greater of (1) $125 million or (2) 10% of the lesser of the total facility or the borrowing base then in effect, for a period of at least 30 days, the Company will be subject to a fixed charge coverage ratio covenant of 1.0 to 1.0 which is calculated as of the last day of the quarter and measured on a trailing four-quarter basis.
On February 8, 2013, J. C. Penney Company, Inc., JCP and J. C. Penney Purchasing Corporation amended and restated the 2012 Credit Facility in the amount up to $1,850 million (2013 Credit Facility) with JPMorgan Chase Bank, N.A., as administrative agent. The 2013 Credit Facility continues to be an asset-based facility, in which borrowing availability varies according to the levels of inventory and accounts receivable, and matures on April 29, 2016. The 2013 Credit Facility increases the letter of credit sublimit to $750 million from $500 million and provides that the Company may at any time prior to the maturity date request that the aggregate size of the facility be increased by an additional amount not to exceed $400 million.
As of February 2, 2013, no borrowings were outstanding under the facility other than the issuance of standby and import letters of credit, which totaled $281 million
JCP had $2.341 billion in Inventory at December 31, 2012, which means that applying the customary 15% ratio to this amount would leave some $2 billion in credit availbility, or enough for substantial facility borrowings. If one was the CFO of a company in need of cash and not in need of spooking vendors this is what one would do, not having a WSJ article describing your suddenly precarious liquidity situation.
So why didn’t JCP do it? Is its inventory so impaired in the eyes of JPMorgan, it refused to grant the company any revolver exposure based on its analysis of the inventory’s “liquidation value” and fears of an imminent bankruptcy? Or is there something much more fishy going on here?
We are confident we will learn much more shortly, now that the Death clock for JCP has just started beating and things will move very fast. For anyone wishing to learn more, we suggest reviewing the Linens’N’Things bankruptcy case study: we have a feeling it will be very applicable in this case.
What is perhaps most stunning about this whol situation is that it was a few short hours ago at a luncheon in New York that Ackman himself may have not only violated Reg-FD telling reporters a part of his presentation is “off the record” when it clearly wasn’t, but that he said this:
What the company needs now though, is somebody who can “stabilize the place” and “calm the vendors“, Ackman said, calling Ullman “the right guy at the right time”.
Even the most naive investor knows that you don’t “calm the vendors” when a WSJ blasts to the entire world you have a $1 billion liquidity crunch. Perhapos Icahn was right and Ackman truly is among the most clueless, if certainly very lucky, of investors out there.
Finally, as JCP itself so conveniently, if boilerplatedly, put in its 10-K, “The future success of our business depends on our ability to generate positive free cash flow (non-GAAP).” How right it was.