J.C. Penney Said to Seek Ways to Split Property for Cash

Photographer: Victor J. Blue/Bloomberg

A customer looks at a pair of yellow pants at a J.C. Penney Co. store in the Queens borough of New York. J.C. Penney fell less than 2 percent to $14.39 at the close in New York. Close

A customer looks at a pair of yellow pants at a J.C. Penney Co. store in the Queens... Read More

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Photographer: Victor J. Blue/Bloomberg

A customer looks at a pair of yellow pants at a J.C. Penney Co. store in the Queens borough of New York. J.C. Penney fell less than 2 percent to $14.39 at the close in New York.

J.C. Penney Co. (JCP) is exploring ways to borrow against its real estate holdings to help raise cash, two people with knowledge of the situation said.

The retailer and its financial advisers are considering options including spinning off real estate into a new subsidiary that could issue debt, said one of the people, who asked not to be named because the matter is private. Certain property-backed transactions may avoid triggering problems under existing bond rules, the person said.

J.C. Penney is also exploring whether it could sell real estate and lease the property back as another way to free up cash, another person said, adding that other assets, such as inventory, could also be collateralized. It has not decided yet which alternatives to pursue, the person said.

Reinstalled Chief Executive Officer Myron Ullman borrowed $850 million from J.C. Penney’s $1.85 billion revolving credit line yesterday, a week after replacing Ron Johnson as CEO. Johnson’s failed effort to overhaul the retailer consumed cash and led to the company’s worst sales in more than two decades. J.C. Penney, which said yesterday it’s working with advisers to raise capital, is focused on issuing debt, said another person familiar with the matter.

Blackstone Group LP is helping J.C. Penney raise at least $1 billion, people familiar with the situation have said. The company also has tapped Centerview Partners LLC for advice, two people said yesterday.

New Unit

“We expect the company to pool its real estate into a new subsidiary and issue senior notes with unsecured guarantees to back these notes,” Cantor Fitzgerald LP analysts said in an April 10 note. “We believe that JCP may be able issue up to $1.5 billion in this context.”

Revolver borrowings will be used for capital spending and to replenish inventory as the company opens renovated home departments next month, the Plano, Texas-based retailer said yesterday in a statement.

“Mike Ullman has his work cut out for him in terms of reassuring suppliers, landlords and employees that J.C. Penney is going to be a going concern,” Alex Fuhrman, an analyst for Piper Jaffray Cos. in New York, said in an interview. Assuming it will have access to the rest of the credit facility, “the company has enough liquidity to make it through the end of this year, but next year is really more of the issue.”

J.C. Penney rose 5.6 percent to $15.19 at the close in New York. The shares declined 27 percent this year through yesterday, compared with an 8.8 percent gain for the Standard & Poor’s 500 Index. The stock sank 50 percent under Johnson’s reign from November 2011 to April 8.

Viewed Positively

While the drawdown was more than four times larger than expected, “any capital raise that is not egregiously expensive would be viewed positively for near-term liquidity,” Carla Casella and Paul Simenauer, analysts at JPMorgan Chase & Co. in New York, wrote in a note yesterday upgrading J.C. Penney’s debt to neutral.

The chain of 1,100 stores reinstated Ullman as CEO on April 8, about a day after Chairman Thomas Engibous first contacted him about returning to the job he relinquished to Johnson in November 2011.

Ullman already has begun reversing some of Johnson’s strategies. J.C. Penney is halting the practice of reducing discounts and will put coupon advertising in newspapers again, Bill Ackman, the activist investor who is the retailer’s largest shareholder, said last week.

The home department, whose renovations were under way when Ullman returned, make up about 15 percent of the chain’s total selling square footage and aren’t generating any sales now.

Inventory Liquidation

The pending lawsuit with Macy’s Inc. (M) over Martha Stewart- brand goods also has clouded the departments’ rollout during the next month. If J.C. Penney loses the dispute and isn’t allowed to sell Martha Stewart items, it may have to liquidate as much as $100 million of inventory, according to Deborah Weinswig, an analyst for Citigroup Inc. in New York.

J.C. Penney was expected to ramp up spending this quarter to finish the home sections, Piper Jaffray’s Fuhrman said. What he didn’t expect was that the company would have to borrow this much from its revolver so quickly.

J.C. Penney showed signs of deteriorating liquidity when its operations consumed $10 million in cash in the year ended Feb. 2, the first year it’s done so since at least 1987, according to data compiled by Bloomberg. The retailer’s operations generated $820 million in cash the previous year.

The company in February increased the size of the revolver to $1.85 billion from $1.5 billion and got permission to expand it to as much as $2.25 billion.

Swaps Rise

Five-year credit-default swaps on J.C. Penney rose 1 percentage point to 15 percent upfront as of 11:11 a.m. yesterday in New York, according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That means it would cost $1.5 million initially and $500,000 annually to protect $10 million of obligations.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

“People are looking for signs of how much of an urgent situation this is, so tapping something to that size puts it in the category of ‘fairly urgent,’” Michael Binetti, an analyst for UBS AG in New York, said in an interview. Binetti expected J.C. Penney to use $160 million from the credit line in the first quarter and $600 million in the second quarter.

Not Opposed

Chief Financial Officer Kenneth Hannah told analysts on a Feb. 27 conference call to discuss fourth-quarter results that the company had plenty of liquidity and would fund Johnson’s transformation of the more than century-old chain with cash from operations. Two weeks later, he said he wasn’t opposed to tapping the credit line.

“Using that revolver for working capital requirements is what it’s intended to be,” Hannah said in a March 13 presentation. “Trying to use it as a substitute for the fact that you’re not connecting with your customer is something that the company has to avoid.”

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; David Welch in New York at dwelch12@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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