J.C. Penney Company, Inc. – Left with Little Choice, Court Approves Access to “Expensive” and Otherwise “Highly Objectionable” $900mn of DIP Financing as Competing DIP Lending Groups Agree to Share the Spoils

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June 5, 2020 – The Court hearing the J.C. Penney Company cases issued an order authorizing the Debtors (i) to access $900.0mn of debtor-in-possession (“DIP”) financing on a final basis and (ii) to continue using cash collateral [Docket No. 566]. On May 16th, the Court issued an interim order approving the use of $500.0mn of cash collateral [Docket No. 108]. 

The order follows a dramatic 24 hours that saw the Debtors enter a final DIP hearing prepared to argue that a proposed alternative DIP financing arrangement ("facially attractive" as it might be given "lower interest rates, lower fees, no contemplated 'roll-up'," etc.) was "critically and irrevocably flawed" [Docket No. 509] only to issue a press release welcoming the offerors of that alternative financing (the "Crossholder Group") to the existing DIP facility. In doing so, the Crossholder Group implicitly concedes that the "inherent unfairness" of the Debtors' DIP financing was not the nature of the proposed interest rates, fees and roll-up themselves (which remain unchanged, see further below); but rather that they had not been invited to share in the spoils. 

For his part, Judge David Jones, faced with the rapprochement of the competing DIP financing groups, saw little choice but to sign the final order; commenting as to the “expensive money” that “If we were in a perfect world, this financing package would be highly objectionable….It is [however] the only path forward that I see.”

In a June 4th press release, the Debtors noted that the DIP financing "includes $450 million of new money from its existing First Lien lenders. The Company had previously received approval to access and use its approximately $500 million in cash collateral. Under the terms of the DIP agreement, JCPenney has access to up to $225 million immediately, and will have access to an additional $225 million as needed after July 15, 2020, subject to certain conditions. In addition, the Company’s Ad Hoc Crossholder Group of lenders has agreed to participate in the rollup portion of the DIP in the amount of $53 million."

Background

The Debtors' DIP motion states: “Immediate access to Cash Collateral is critical to the Debtors’ restructuring efforts. Nearly all $500 million of the Debtors’ cash on hand is Cash Collateral and is necessary to pay nearly 85,000 associates, restock stores with merchandise, maintain operations, and administer these chapter 11 cases as the Debtors look forward to reopening stores and emerging from the 'cash preservation mode' implemented in light of the coronavirus pandemic. This cash preservation mode involved several measures to pause outflows and protect the Debtors. First, the Debtors drew down $1.25 billion on their ABL Facility. Second, they paused all hiring, cut spending, reduced receipts of merchandising goods, and suspended all merit pay increases for 2020. Third, they extended payment terms with their vendors. Fourth, the Debtors made the incredibly difficult decision to implement both partial and full furloughs that have affected nearly all of the Debtors’ employees. Fifth, the Debtors did not pay the majority of May rent on account of temporary store closures. These difficult but necessary measures not only shielded the Debtors from immediate danger, but enabled the Debtors to enter chapter 11 with sufficient liquidity to responsibly operate and maintain their businesses for the first few weeks of the cases.

As the Debtors look forward to reopening more stores in the coming weeks and months, their need for additional liquidity will grow. The Debtors’ businesses are capital intensive and require constantly bringing in fresh inventory to stock their shelves, both online and in stores. To that end, the Debtors have negotiated for $450 million in new liquidity through the DIP Facility to help finance operations and create a bridge as the Debtors pursue the restructuring embodied in the RSA… ”

Key Terms of the DIP Facility

  • Borrower: J. C. Penney Corporation, Inc. (the “DIP Borrower”).
  • Guarantors: J. C. Penney Company, Inc. and each its subsidiaries that are Debtors other than the Borrower.
  • DIP Lenders: Those DIP Lenders identified on Schedule 1 to the DIP Term Sheet attached to the DIP Commitment Letter attached as Exhibit A.
  • DIP Agent: GLAS USA, LLC.
  • DIP Commitments: An aggregate principal amount of $450.0mn in new money commitments and a $450.0mn roll-up of the Term Loans, to be funded in multiple borrowings as follows: (a) up to $225 million made not later than one business day following the entry of the DIP Order (as defined below) (the “Initial Borrowing”), and (b) the remainder of the Total Aggregate Commitment in an aggregate principal amount equal to $225 million (the “Subsequent Borrowing”) made available following the entry of the DIP Order on July 15, 2020, subject to satisfaction of the Conditions Precedent to Initial Borrowing and the Conditions Precedent to the Subsequent Borrowing.
  • Interest Rate: Loans under the DIP Facility will bear interest at a rate, at the DIP Borrower’s option, equal to the Base Rate plus 10.75% per annum or LIBOR (subject to a 1.25% floor) plus 11.75% per annum, compounded monthly and payable monthly in cash in arrears. At any time when an Event of Default under the DIP Facility has occurred and is continuing, all outstanding amounts under the DIP Facility shall bear interest, to the fullest extent permitted by law, at the interest rate applicable to base rate loans plus 2.00% per annum and shall be payable on demand in cash (the “Default Rate”). Interest on overdue amounts under the DIP Facility shall also accrue at the Default Rate and shall be payable in cash.
  • Fees and Expenses: 
    • Commitment Premium: 6.00% of each DIP Lender’s initial commitments in respect of the $450 million “new money” portion of the DIP Facility.
    • Upfront Premium: 4.00% of each DIP Lender’s commitments in respect of the $450 million “new money” portion of the DIP Facility on the Petition Date, which shall be earned, due and payable upon execution of the Commitment Letter.
    • Exit Premium: 3.00% of each DIP Lender’s funded Loans or unfunded commitments under the DIP Facility (including the “new money” and rolled up portion of the DIP Facility) on the Maturity Date or on the date of any earlier voluntary or mandatory prepayment (the “Exit Premium”)
  • Roll Up: On the date of entry of the Final Order approving the DIP Facility, $225 million in principal amount of the Prepetition Term Loans held by the DIP Lenders (or their applicable designees) shall be rolled up into the DIP Facility in accordance with each such Prepetition Term Loan Lender’s share of the DIP Facility. On the date the Subsequent Borrowing, a corresponding amount of principal amount of the Prepetition Term Loans held by the DIP Lenders (not to exceed an additional $225 million in the aggregate) shall be rolled up into the DIP Facility on a dollar-for-dollar basis in accordance with each such Prepetition Term Loan Lender’s share of the DIP Facility.
  • Maturity Date: The DIP Facility will mature on the earliest of (such earliest date, the “Maturity Date”):
  1. the date that is 180 days after the Petition Date (the “Scheduled Maturity Date”);
  2. 20 days after the Petition Date, if the DIP Order (as defined below) has not been entered by the Bankruptcy Court prior to the expiration of such 20-day period;
  3. the effective date of a plan of reorganization or liquidation in the Chapter 11 Cases;
  4. the consummation of a sale of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code or otherwise;
  5. without the DIP Agent’s prior written consent, the date of filing or express written support by the Debtors of bidding procedures, sale processes, transactions, plans of liquidation or reorganization or related disclosure statements that are not in accordance with the RSA, if applicable, and that are not otherwise acceptable to the DIP Lenders;
  6. the date of termination of the DIP Lenders’ commitments and the acceleration of any outstanding Loans, in each case, under the DIP Facility in accordance with the terms of the DIP Facility credit agreement (the “DIP Credit Agreement”) and the other definitive documentation with respect to the DIP Facility (collectively with the DIP Credit Agreement and the related security documents, the “DIP Documents”);
  7. any breach by the Debtors which has not been cured or waived or termination of the RSA after the effectiveness thereof;
  8. dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code;
  9. the Debtors shall lose access to the use of cash collateral in accordance with the Cash Collateral Order (as defined below), subject to any applicable remedies notice period; and
  10. other customary circumstances to be mutually agreed.

Prepetition Indebtedness

Secured Debt 

Principal

ABL Facility

1,179.0mn

First Lien Term Loan

1,521.0mn 

First Lien Notes

500.0mn 

Second Lien Notes

400.0mn 

Total Secured Debt

$3,600.0mn

Unsecured Debt 

Principal

5.650% Unsecured Notes due 2020

105.0mn 

7.125% Debentures due 2023

9.0mn 

6.900% Unsecured Notes due 2026

2.0mn 

6.375% Unsecured Notes due 2036

388.0mn 

7.400% Debentures due 2037

312

7.625% Unsecured Notes due 2097

500.0mn 

Total Unsecured Debt

$1,318.0mn

Total Debt Outstanding

$4,918.0mn

About the Debtors

J. C. Penney Company, Inc. (NYSE: JCP), one of the nation’s largest apparel and home retailers, combines an expansive footprint of approximately 850 stores across the United States and Puerto Rico with a powerful e-commerce site, jcp.com, to deliver style and value for all hard-working American families. At every touchpoint, customers will discover stylish merchandise at incredible value from an extensive portfolio of private, exclusive and national brands. Reinforcing this shopping experience is the customer service and warrior spirit of nearly 85,000 associates across the globe, all driving toward the Company's mission to help customers find what they love for less time, money and effort.

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