J.C. Penney Taps $850 Million From Revolver

New CEO Ullman seeks to improve retailer’s liquidity.

J.C. Penney Co. drew $850 million from its revolving credit facility as new Chief Executive Officer Myron Ullman hunts for cash in the wake of his predecessor’s failed overhaul.

A week after replacing Ron Johnson as CEO, Ullman is trying to improve J.C. Penney’s liquidity following the first year in which retailer’s operations consumed cash in decades. The drawdown on the $1.85 billion credit line 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 today in a statement.

J.C. Penney, which today said it is working with advisers to raise additional capital, is focused on selling debt, said a person familiar with the matter, who asked not to be identified because the talks are private. While raising cash by selling a stake to a private-equity firm is being considered, it’s not the primary option, the person said.

“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 fell 1.6 percent to $14.39 at the close in New York. The shares have declined 27 percent this year, 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.

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

When compared to Johnson, Ullman “certainly takes a much more conservative approach to our spending and our cash reserves,” Daphne Avila, a spokeswoman for J.C. Penney, said. “He prefers to operate with a much larger cushion.”

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 today upgrading J.C. Penney’s debt to neutral.

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


Adding Coupons

J.C. Penney is halting the practice of reducing discounts than Johnson enacted 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 departments, 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.

The pending lawsuit with Macy’s Inc. 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, Fuhrman, the Piper Jaffray analyst, said in an interview. What Fuhrman 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 they’ve 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.

Five-year credit-default swaps on J.C. Penney rose 1.1 percentage point to 15.1 percent upfront at 4:11 p.m. 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 $1.51 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.

Chief Financial Officer Kenneth Hannah, who was hired during Johnson’s stint, 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.”


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