Troubled retailer J.C. Penney Co. Inc. (NYSE: JCP) is holding advanced discussions with current lenders for a debtor-in-possession (DIP) loan package to keep the company operating while it restructures during a court-supervised bankruptcy. An exclusive report in The Wall Street Journal cited people familiar with the matter as sources.
J.C. Penney’s current lenders include Bank of America, Wells Fargo and JPMorgan. The DIP package would total $800 million to $1 billion, and the total may include already existing debt.
Because J.C. Penney missed an interest payment of $12 million due on April 15, the company has a grace period of 30 days during which it could file for bankruptcy. The unpaid creditors could offer J.C. Penney forbearance, but that’s only likely if the company is working on a DIP plan.
The company in March filed a notice with the U.S. Securities and Exchange Commission detailing an effort the company made in 2019 to secure financing using J.C. Penney’s real estate as collateral. The potential lender was not identified, but the discussions were unsuccessful.
If J.C. Penney succeeds in securing DIP financing, it will be because current creditors want to firm-up their grip on the company’s assets before a bankruptcy proceeding begins. For potential lenders, DIP financing is as close to a sure bet as it’s possible to make.
The only question a lender has to ask is whether the DIP package offers a better return than a bankruptcy liquidation. According to a study of DIP financing published in March, only once in the past 30 years has a DIP loan failed to be fully repaid. DIP loans are overcollateralized, come with “super-priority, strong covenants, rollups, and debtor-funded monitoring costs” and “are almost risk-free.”
The prospect of a DIP loan wiping out shareholders and virtually everyone else pushed J.C. Penney’s stock down by around 9% early Friday at $0.25 per share. The stock’s 52-week range is $0.20 to $1.37
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