J.C. Penney Can Raise Billions Under Revised Credit LineMiles Weiss
J.C. Penney Co., the retailer backed by hedge-fund manager William Ackman, got clearance from lenders to sell billions of dollars in stock and debt if needed as it struggles to complete a turnaround.
Under changes to the company’s primary credit line, its banks affirmed that J.C. Penney can sell convertible preferred stock without triggering repayment provisions under the lending agreement, according to a Feb. 12 regulatory filing. The revisions also permit the department store chain to obtain as much as $1.75 billion in new loans by pledging real estate and other fixed assets as collateral, said Judah Frogel, an analyst at Covenant Review LLC in New York.
The retailer has posted five consecutive quarters of losses as Chief Executive Officer Ronald Johnson’s seeks to transform the chain by creating in-store boutiques and reducing reliance on coupons and sales events. The Plano, Texas-based company moved to block efforts by a group of bondholders to declare a default over a provision in the original credit line.
“If you consider the fact that J.C. Penney has been losing money heavily and its strategy is based on revamping the stores over a three-year period, there is a need for cash,” said Bernard Sosnick, an analyst at New York-based Gilford Securities.
Ackman is on J.C. Penney’s board and his Pershing Square Management LP ranks as the retailer’s largest stockholder through its 18 percent stake. The revised credit agreement permits New York-based Pershing Square to increase its holdings.
J.C. Penney rose 4.3 percent to $22.47 in New York, after climbing as much as 7.2 percent. The stock jumped 6.7 percent yesterday.
J.C. Penney originally entered into the credit accord in January 2012, when it had a limit of $1.5 billion secured by inventory and receivables, an arrangement typically referred to as an asset-based loan. The retailer increased the credit line to $1.75 billion on Jan. 31.
J.C. Penney has yet to borrow any money under the credit line, provided by a syndicate of banks including units of JPMorgan Chase & Co. and Bank of America Corp.
“These guys say they are just adding $100 million,” said Frogel of Covenant Review, a New York-based provider of research on debt covenants. “But they are actually doing a lot more.”
Joey Thomas, a J.C. Penney spokesman, said in e-mailed statement that the amended agreement “further strengthened the company’s liquidity position as we continue to execute our strategic plan.”
J.C. Penney has lost almost half its stock-market value in the past year, making it the fourth-worst performer among companies in the U.S. benchmark Standard & Poor’s 500 Index. The decline has weighed down the returns of Pershing Square’s funds, which had about 9 percent of their capital invested in J.C. Penney as of November, according to a letter Ackman sent to clients at the end of that month.
The retailer’s cash and equivalents fell to $525 million at the end of the third quarter from $888 million three months earlier, the company said in a Nov. 9 earnings presentation. Ken Hannah, J.C. Penney’s chief financial officer, said at the time the company would end the fiscal year with $1 billion in cash. The total will probably be closer to $700 million, according to Rick Snyder, an analyst at New York-based Maxim Group LLC.
A copy of the amended borrowing agreement filed with the U.S. Securities and Exchange Commission on Feb. 12 shows new terms that, among other things, give J.C. Penney leeway to raise money through a stock sale underwritten by a financial institution. The amended filing affirms that this type of equity offering won’t trigger change of control provisions in the credit line that authorize lenders to force repayment of any outstanding borrowings if J.C. Penney is acquired.
The revised agreement says “any preferred equity interests” that are convertible into common stock won’t be counted in tabulations of the company’s total debt burden. It includes new language on a “rights offering” in which J.C. Penney gives existing stockholders the opportunity to purchase “additional equity interests.”
Pershing Square and Steven Roth’s Vornado Realty Trust both invested in J.C. Penney in October 2008 and have consulted each other on their respective stakes. The revised agreement exempts Pershing Square and Vornado from terms in the credit line that say a change of control occurs when any outside investor acquires more than 42.5 percent of the company’s “aggregate equity value.”
Under existing shareholder agreements with J.C. Penney, Pershing Square and Vornado can acquire respective “economic” stakes equaling 26.1 percent and 15.4 percent of shares outstanding through the use of derivatives such as total return swaps.
Ackman, a member of J.C. Penney’s board, and Roy Katzovicz, the chief legal officer at Pershing Square, both declined to comment. Wendi Kopsick, a Vornado spokeswoman, said the New York-based real estate company “has no plans to increase its position” in J.C. Penney.
J.C. Penney and its bankers also amended the agreement to permit the retailer to borrow an additional $1.75 billion that is secured by a first lien on the company’s fixed assets, such as real estate or intellectual property, according to Frogel. The revised agreement also allows J.C. Penney to give other creditors a second lien on the inventory and receivables backing the credit line provided by the banks.
The store inventory is the subject of a Jan. 29 notice of default the department store chain received from Brown Rudnick LLP, a law firm that says it represents investors holding more than 50 percent of J.C. Penney’s 7.4 percent debentures that mature in 2037.
Brown Rudnick asserts the bondholders have a claim to the collateral as well, according to a complaint J.C. Penney filed in Delaware Chancery Court on Feb. 4. J.C. Penney is asking the court to bar the trustee for the bondholders from declaring an event of default, claiming the debentures are secured by “principal property,” which the chain defines as stores and warehouses, not their inventory.
The timing of the bondholders’ claim suggests Carl Icahn, the billionaire investor engaged in a public spat with Ackman over Pershing Square’s bet against Herbalife Ltd., may be behind the bondholders group, the financial website Zero Hedge reported earlier this month. Bondholders didn’t complain about the credit agreement, which has been in place for a year, until after Icahn and Ackman last month revived their decade-old feud on national television.
Icahn, who spent more than seven years fighting Ackman in court over a $4.5 million claim, said in a Bloomberg Television interview on Jan. 24 that he doesn’t “like” or “respect” the hedge-fund manager. A day later, Icahn engaged in an on-air dispute with Ackman on CNBC and subsequently issued a statement saying his foe was taking “inordinate risks” through a bet against Herbalife, the marketer of weight-loss and nutritional supplements.
Icahn didn’t reply to requests from Bloomberg News for comment on J.C. Penney.
Best known as an activist investor, Icahn has previously bought the distressed bonds of companies such as Revlon Inc., the cosmetics manufacturer controlled by Ronald Perelman.
In obtaining the right to use its fixed assets and inventory for additional borrowings, J.C. Penney is showing it’s not “afraid” of the bondholders’ default claims, Frogel said. “The fact that the company built this flexibility into the asset-based loan only goes to further draw the line in the sand,” he said.
Thomas, the J.C. Penney spokesman, said in a second e-mailed statement that the company’s Feb. 12 announcement is “independent and unrelated” to the default notice received from bondholders. James Stoll, the Brown Rudnick attorney representing the bondholders, said in a telephone interview that he didn’t think that responding to the default notice “was the intent of the credit agreement” revisions.