J.C. Penney: Interest Costs Could Be Reduced By Over $110 Million Per Year

| About: J.C. Penney (JCP)

Summary

J.C. Penney closed the refinancing of its secured debt, resulting in $13 million per year in cash interest savings and pushing the 2018 maturity out to 2023.

The $1.688 billion secured credit facility is priced at LIBOR + 425 basis points, with a 1% LIBOR floor, a 75 basis point reduction from before.

Debt maturities from 2016 to 2020 now seem manageable via cash flow and headquarters sale/leaseback proceeds.

This will decrease J.C. Penney's debt by over $1.4 billion (including term loan repayments) over the next few years.

Cash interest costs may decrease by over $110 million, leaving it potentially able to reach breakeven cash flow with $700 million EBITDA.

J.C. Penney (NYSE:JCP) announced that it closed the refinancing of its $2.25 billion senior secured term loan credit facility that was maturing in 2018. The remaining balance on that credit facility was $2.188 billion, and it was refinanced with a $1.688 billion credit facility maturing in 2023 and $500 million in 5.875% Senior Secured Notes also maturing in 2023.

J.C. Penney did mention that it expects around $24 million in annualized interest expense savings, although I'm not sure how that is calculated. My own calculations indicate around $13 million per year in cash interest savings, assuming that LIBOR remains at 1% or below.

Aside from the interest savings, the refinancing clears a path for J.C. Penney to deal with its debt maturities over the next few years via cash flow. This could result in its interest costs falling by over $110 million per year (including the secured debt refinancing savings).

Debt Maturities Are Manageable

Below is a table showing J.C. Penney's debt maturities in $ Millions before and after its recent debt transactions. The $2.453 billion in debt maturing in 2018 has now been reduced to $265 million, with the other $2.188 billion now maturing in 2023.

Maturity

Before

After

2016

$78

$78

2017

$220

$220

2018

$2,453

$265

2019

$400

$400

2020

$400

$400

2023

$10

$2,198

2026

$2

$2

2036

$388

$388

2037

$313

$313

2097

$500

$500

Click to enlarge

It appears that J.C. Penney should be able to handle its new debt maturity schedule up to 2023 via cash flow. J.C. Penney anticipates generating $400 million to $500 million in positive cash flow during 2016 via a combination of its operations and the headquarters sale/leaseback transaction. This would cover its 2016 and 2017 debt maturities and the $21 million in remaining quarterly term loan repayments that are due in 2016 (these repayments increase to $42 million per year after), as well as boost J.C. Penney's cash position by a bit.

If J.C. Penney reaches its $1.2 billion EBITDA target for 2017, it can probably generate positive cash flow of $400 million, which would be enough to cover its 2018 debt maturity and the term loan repayments. Even if J.C. Penney falls a bit short of that EBITDA goal, it should be able to handle the 2018 debt maturity via cash flow.

Generating enough cash flow to pay back its 2019 and 2020 debt maturities would probably require J.C. Penney to maintain around $1.2 billion EBITDA per year as well if it wants to spend a normalized amount on capital expenditures. If it can do that, it will have wiped out $1.363 billion in maturing debt from 2016 to 2020 without refinancing.

Interest Savings

J.C. Penney noted that the rate on its new term loan was 75 basis points lower than its old term loan. The old term loan had a variable rate of LIBOR + 500 basis points with a 1% LIBOR floor, so the new term loan appears to be priced at LIBOR + 425 basis points, with a 1% LIBOR floor as well. This is about 25 basis points better than what I had believed that J.C. Penney would get before. As mentioned earlier, the lower interest rates for the new secured term loan and notes translate into approximately $13 million per year in cash interest savings.

As well, J.C. Penney appears to benefit (at least in the short term) from the lowered probability of rising interest rates. J.C. Penney has $1.688 billion in variable interest rate debt, so it faces some potential increase (subject to interest rate hedging) in interest costs if LIBOR goes above 1%.

If J.C. Penney can pay down its 2016 to 2020 maturities via cash flow, it can reduce its cash interest costs by over $110 million per year (including the interest savings from the recent refinancings).

Conclusion

The refinancing of its secured debt appears to reduce J.C. Penney's cash interest costs by $13 million per year and pushes back the maturity of a substantial proportion of its debt to 2023. This gives it a reasonable path to pay down its 2016 to 2020 debt maturities via operational cash flow and the proceeds from its headquarters sale/leaseback. Paying back this debt instead of refinancing it could reduce J.C. Penney's cash interest costs by over $110 million per year within a few years. This would also allow J.C. Penney to end up with a net debt to EBITDA multiple of 2x or under by 2019/2020, even if EBITDA stalls out at $1.2 billion.

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Disclosure: I am/we are long JCP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.