J.C. Penney draws down $850 million to keep liquidity

Published April 15, 2013

| Reuters

J.C. Penney Co Inc said on Monday that it was borrowing $850 million from its $1.85 billion revolving credit facility to help buy inventory as the department store operator plots its course after a failed turnaround.

The company will use the proceeds to fund its working capital needs and capital expenditures, including buying inventory as it revamps its home goods department, an effort it expects to complete next month.

The borrowing, which one analyst said was bigger and sooner than expected, ends a flurry of recent speculation about J.C. Penney's financial position after months of mounting tension erupted last week in the departure of Chief Executive Officer Ron Johnson.

It also shows that so far, there is "no potential equity investor ready with a checkbook," said Gimme Credit analyst Carol Levenson.

"It's good that the company has the flexibility to do this," Levenson said, "but it also demonstrates that the 'internally financed transformation' envisioned by previous management was a pipe dream."

The borrowing is subject to an interest rate of 5.25 percent and matures in April 2014.

Chief Financial Officer Ken Hannah said the draw provided more current funding than needed to ensure liquidity and that J.C. Penney would continue to explore additional capital-raising options with its financial advisers.

"As we near completion of the home department transformation in over 500 stores, we have been undertaking and will continue to experience a significant inventory build and increase in capital expenditures," Hannah said.

A company spokesman declined to elaborate on the news, but did say there were no plans to cut jobs or close stores due to the company's performance.

All vendor invoices have been paid on time and as scheduled, he said.

Standard & Poor's Ratings Services said the move had no immediate effect on the company's ratings or outlook.

"Our assessment of the company's liquidity remains 'less than adequate,'" the agency said in a note. "If the company were to increase its total secured debt beyond the revolver, this could have a negative effect on the issue-level rating on the unsecured debt."

J.C. Penney shares were up 2.5 percent at $14.99 in midday trading.

OPTIONS

The company is working with the advisory arm of Blackstone Group LP , sources told Reuters last week, adding that J.C. Penney had been in contact with several private equity firms about a possible investment.

Hannah said in February that the company increased its line of credit to $1.85 billion from $1.5 billion and expanded the accordion feature to $400 million from $250 million. It also increased the number of lenders.

Coupled with cash on hand, the amendments gave J.C. Penney access to short-term capital of about $3 billion, Hannah said at the time.

The loans were arranged by JP Morgan Securities LLC , Bank of America Merrill Lynch , Barclays Capital and Wells Fargo Capital Finance .

When the facility was amended, the company said it had not drawn any funds. In March, Hannah said he was not opposed to using it for working capital needs.

J.C. Penney, which competes with Kohl's Corp and Macy's , brought in Johnson as CEO in November 2011, after major shareholder and board member William Ackman picked the Apple Inc guru to lead a turnaround.

Sales slid in 2012 as Johnson's dramatic changes alienated core customers without bringing in new ones.

Last week, Johnson was replaced with his predecessor, Myron Ullman, who is bringing back the old pricing strategy that relied heavily on coupons to draw in shoppers.

(Reporting by Martinne Geller in New York, Lisa Baertlein in Los Angeles, Jessica Wohl in Chicago; Editing by Gerald E. McCormick and Lisa Von Ahn)

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