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J.C. Penney Takes On $400 Million In 2nd-Lien Debt


  • J.C. Penney is adding $400 million in 8.625% second-lien notes due 2025.
  • It is using the proceeds mainly for its tender offer for its 2019 and 2020 unsecured notes.
  • The 2019 and 2020 notes are now essentially dealt with, but I believe the ultimate goal of these moves is to improve J.C. Penney's 2023 secured debt situation.
  • J.C. Penney will incur around $50 million to $60 million in costs in order to ultimate reduce its 2023 first-lien debt principal by around $340 to $350 million.
  • I view these moves as being slightly negative for J.C. Penney's stock and slightly positive for its longer-term unsecured debt.

J.C. Penney's (JCP) move to take on $400 million in second-lien debt to help repurchase its near-term debt maturities can be seen as a largely defensive move. The second-lien debt offering is likely aimed at reducing the risk around its 2023 first-lien debt maturities, as the cash flow that would have gone towards its 2019 and 2020 unsecured debt maturities can now go towards reducing its term loan balance.

The cost of the tender offer premiums, debt offering fees and the increased interest rates are expected to add up to around $50 million to $60 million by the end of 2022. Basically, J.C. Penney is paying that amount of money in order to reduce the amount of 2023 secured debt that it needs to refinance by around $340 million to $350 million.

Near-Term Debt Maturities

The 2019 and 2020 maturities are now essentially taken care of, with the tender offer potentially reducing the outstanding 2019 notes to $80 million and the outstanding 2020 notes to $135 million. J.C. Penney should be easily able to use its free cash flow to deal with the remaining 2019 and 2020 notes. J.C. Penney could have dealt with the 2019 and 2020 maturities via free cash flow and its secured credit facility (if needed), but it appears to have made this move to help plan for its 2023 secured debt maturities. Using its secured credit facility (which currently matures in 2022) to cover any gap between free cash flow and the 2019 and 2020 debt principal would not have helped J.C. Penney's 2023 first-lien debt maturities.

The 2023 Secured Debt

The playbook for J.C. Penney now may be to put its positive cash flow towards prepaying its 2023 term loan, which doesn't appear to have any penalties for voluntary prepayment. This term loan had around $1.625

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

Analyst’s 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.

Long KTP

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Comments (78)

These utter fools have pro-rated at 99.2% (......) leaving small bond holders with a tiny remaining balance. Why didnt they just buy out all small holders below $x? The stupidity of some people is breath-taking.
900 billion in debt! Wow
Is this transaction done? Did they gave any information about the tender offer and how well it was received?
sfinvestor profile picture
EA, distribution center in WI sold for 31.25m. not 50m+.
Flipper2058 profile picture
Credit Suisse report has a brutal 20% drop in EBITDA forecasted for out to 2021 they came out with this morning, FWIW. This is off a 5-6% drop in Sales. Net debt down 16%. the thesis is Department stores are not closing fast enough to offset fixed charges. Needless to say they are bearish on gross margins.
You may access this if you have TD Ameritrade account. I suggest all look at it that own stakes here.
sfinvestor profile picture
yep, I don't need credit Suisse to tell you.

1. class b malls, dead
2. apparel is dead. off price popping near them is killing them.
3. JCP is broke from a capex perspective. there will be no meaningful change unless you think canning your old cto for a new one counts.
5. JCP management sux. who in their right mind put coo, or customers with merchandising, complete mxrxns over there.
Isn't Credit Suisse bearish on AMD when it is at 2 dollars? Now look at AMD.

I also remember bearish argument on BAC when it is at 5 dollars.

I am not saying these analysts are always wrong but even broken clock is right twice a day.
Flipper2058 profile picture
I look at their numbers not their conclusion on a stock price. JCP common is an option value, it's $10+ or zero. To say it's worth $2.50 or $4 is rather silly IMHO.
People realise early redeemption of the 2020 bonds is not obligatory? Holders have the right not to accept the offer and hold to maturity. I am not sure why those who bought below 90 would accept the offer.
sfinvestor profile picture
JCP paying 1040 on 1000. It's decked in a way so JCP will lose 3% over market value (so bondholder gets a 3% candy). The tender offer will be gladly accepted. I bet most rolled that over to the new 2025.

If you own these, accept it and count your blessings.
sfinvestor profile picture
If you bought below 90, that's awesome. At the end of the day, they will redeem at 100 and not a cent more. So getting 104 is obviously a deal.
Yes, but you are losing 2 years+ of interest at about 6.5 % (depending how far below 90 you bought at) to net against the 4% total gain (less than 2% pa averaged out). Not everyone will want to roll into 2025 (I don't see JCP going BKK by June 2020 - but by 2025? ). If people can find that yield to June 2020 elsewhere net of bond dealing costs OK, if not they will hang on in.
Darren McCammon profile picture
When you own KTP, what you probably care most about is survival time. JCP doesn't need to thrive, mear survival is good enough, the longer they can survive, the more payments you collect.

The point behind the refinance is you use cash flow to pay the rest of the 2019, 2020, then start working down the 2023 bolus of debt $1.6b & .5B. As things currently stand, figure they can get that down to $1.2b total by the time they get there. Better if they can increase cash flow between now and then, worse if it decreases, but the point is you bought time. You clearly make it to 2023 then they will need to be able to roll what remains of the 2023 bolus of debt.

We won't know if they will indeed be able to roll the 2023 debt until we get there, but they are now very likely to get to 2023 by which time KTP will have paid a bunch of additional interest payments. So if they can roll the remaining 2023 debt KTP is golden (upside). If they can't and have to go BK in 2023, 20¢ of par would make current KTP purchases whole (controlled downside).

Survival, particularly how long JCP can survive, is what KTP holders most care about. The refinance enhanced survival time.
Flipper2058 profile picture
"We won't know if they will indeed be able to roll the 2023 debt until we get there"

We will have a pretty good idea though watching the below $500m senior secured bond prices. I am going on this issue is junior to the $1.6b term loan.

Coupon Rate



Maturity Date


Next Call Date

Last Trade Price
Last Trade Yield
Last Trade Date

"Survival, particularly how long JCP can survive, is what KTP holders most care about."

The same could be said for those in the common. But I do like the idea getting paid to wait.
Darren McCammon profile picture
Penney's goes 10 years and then goes BK, KTP are better off than JCP holders. 5 years, same thing. 3 years, same thing. JCP common holders need JCP to do better in order to make money, KTP holders just need it to continue to survive.
Flipper2058 profile picture
"JCP common holders need JCP to do better in order to make money,"

Yes and no...the market cap is 20% of the Enterprise value. If cash reduces debt than the equity becomes a larger portion of the EV. If what we see today continues, this will be the path. So "in the future" as debt is paid down then equity in theory has a higher share. Less debt will command a higher multiple.
Once JCP has normal access to traditional bond markets then little has to be applied for debt retirement. They don't need to fund cap ex with cash either. It's a huge diversion of cash flow then. Yes?
IMHO, THIS is when you buy the stock and sell the bonds.

Some can speculate it WILL happen this way, Einhorn actually has started a common position.

FTR at 3% market cap to EV is JCP on steroids...
Flipper2058 profile picture
There is still $80m left of the 2019 and $135m left of the 2020 yet to mature. I assume they feel comfortable that level can be paid off in cash.


Beyond that is:
2023 $1.6b term loan
2023 $500m senior secured
2026 $400m 2nd lien secured
2036 $388m unsecured
2037 $313m unseucred
2097 $500m unsecured

So obviously focusing and getting 2023 done correctly ( move to unsecured?) is literally the key to JCP's future. A move to float more unsecured allows them to free up secured capacity again.
I really hope JCP can pay off 2023 $500m senior secured using cashflow instead of issuing more debt -- secured or not.

Once passing 2020, JCP has 3 years of breather to accumulate some cash.
The 2026 $400m junk bond is terrible deal. 8.7% interests is terrible. It is like drinking sea water to quench thirst.

They could have just borrowed $200m. Why that much? Marvin must be scared of something.
sfinvestor profile picture
"Why that much? Marvin must be scared of something."

JCP shareholders got duped by improvements and management talking point. It's been sell, cut, invest in nothing. There has been no improvements the past 2 years. Don't expect miracles, JCP can easily fall apart the next 2 years.

Look at 2016 and now, JCP is in deepshxt.

Remember apprarel, they got an orgasm over that until Q3 when they dumped them all. Guaranteed the new batch is just as crappy and inventory dump coming at some point.
Flipper2058 profile picture
"They could have just borrowed $200m."

If you look at most firms that filed you will find they did the same thing, they used up their bank lines to retire debt. It's the last line of defense I find. CHK has a full untapped bank line, they didn't use and stay out of court. It's a wise choice even if it costs more.

I was with sfinvestor 4 years ago. I didn't think JCP could make it without a filing. But their capital management program has been good. So they have managed to dig out. I see all these move as smart moves. The best? Nothing is "the best", you just do the best option at the time of course. But you DO something, nothing is the worse thing you can do.

For me the stock is still uninvestable, it's a spec, because so much cash needs to be diverted to debt retirement versus equity enhancing ventures. It will be a trader but can not break out until more cash can be used to increase sales IMHO.
sfinvestor profile picture
I told the board long ago JCP will not be able to handle the 2020. give me a break this is preemptive for 2023.

this is straight up can't pay for 2020 and they have to roll over to 2020 and eating 40m in additional fees, cost, premiums and interest focus for the next 24 months.
Flipper2058 profile picture

The issue is what is the best use of FCF if they have it. Hoarding it as they have done is a wise move because the future is unknown. With any balance sheet restructuring you make the best choice at the time. In 2 years, who knows? There is plenty of bad sentiment in this business and coming off a good Christmas makes sense to hit on the first good news in a long time here.
So assuming in 4 years we have entered a recession and even first lien debt is scared. Then what? Having a pile of cash on the balance sheet is a good bet. It's all net total debt anyway. Roll the debt when you can, not when you are forced if at all possible.
"Roll the debt when you can." -- This is the right strategy!
Flipper2058 profile picture
All this is based on one thing, when JCP can reenter the traditional bond market for its needs. At that point cash flow can be diverted from debt repayment to equity enhancing things. Trying to model out correctly when that MAY happen would make you a trillionaire.
sfinvestor profile picture
EA, you are wrong that they issue junk bonds to pay for 2023 secured ones. that is faulty logic.

2023 is secured and lower inverts rates, this new one is second lien with 8.625%. It's like saying taking on credit cards to pay off your mortgage. don't think so.

JCP panicked and can't pay for 2019 and 2020. that's why they have to take this garbage, when they said they could have handled it.
Elephant Analytics profile picture
The 2019 and 2020 notes weren't an issue. Worst case scenario, JCP could have used its credit facility to cover any gap between cash flow and debt principal on those notes. The debt markets were pretty unconcerned with JCP's ability to deal with those notes. I think the 2020s were trading at around par prior to the tender offer.

However, doing that would put JCP in a tougher position for its 2023 secured debt. If JCP's business deteriorates somewhat or if the credit markets become tight due to a recession, JCP would be left with a lot of secured debt to refinance in tougher conditions with no real ability to issue junior debt.
sfinvestor profile picture
so you are saying jcp management are morons. the fact is this loan is junk, we all know that.

they panicked and lost and look like amateurs. good luck with this management.
Elephant Analytics profile picture
I'd characterise it as a cautious/defensive move rather than a panicky one.

It is sort of like buying insurance. There's probably a fairly high chance the move isn't going to make a difference in the end, but it does reduce the chance of a catastrophic scenario playing out with regards to its secured debt.
Flipper2058 profile picture
BTW, the bond to follow now publicly traded is the $500m secured bond term in 2023 now the 2020 is dealt with. The goal could be to rid this bond too as it may be more difficult to roll than the term loan?
Landlord Investor profile picture
Do you know if the secured bond is first lien or second? Either way, I’d assume that the loan easier to refi. Even if its not more sr than the bond, loans usually come with stricter covenants.
Flipper2058 profile picture
THe $500m of 2023 is listed as senior secured and I'd put a small wager (not big ;-) that it is junior to the term loan.
I would disagree this debt would be easier to refinance than the term loan. Because the term loan has so many covenants makes it easier to refinance, not worse.
Elephant Analytics profile picture
I believe the 5.875% notes are pari passu to the term loan.


I suspect those 2023 notes may drift a bit lower as interest rates increase.
Flipper2058 profile picture

I had viewed it differently, but your explanation makes more sense. Rolling the near term debt into a longer note and take cash to work on the term loan to make it more likely to be refinanced. I had assumed they would go into 2023 and try and roll the whole term loan. Your suggestion is better.
Since they can't retire these maturities fully this is a good plan.
We in the JCP trusts still face the possibility even a reduced term loan can not be refinanced but it maybe less of one now. Clearly if they file our recovery value is vastly reduced now, but you don't own long JCP debt if you think they file, that's for sure.
The trusts have been weak, yielding in the mid 13.50% level. Figure 9 dividends at $.95 until 2022..beyond that...who knows. At $14 means future break even of $5.45 to get to 2023. If they file afterward those trusts will drop to $2-$4 I would assume. So it's still not a bad risk/reward trade.
FTR recently sold $1.6b in 2nd lien and the rating agencies responded with a downgrade of the LT unsecured debt on subordination (I think SP had 45% recovery at one point), so the agencies may respond the same with JCP unsecured too? We will see.
Landlord Investor profile picture
“We in the JCP trusts still face the possibility even a reduced term loan “

That would only happen if JCP’s situation worsens from now. The market is willing to issue second lien debt, therefore it should be willing to refi first lien debt. They just refinanced their revolver at slightly improved terms a few months ago, so refi of secured debt doesn’t seem to be a problem right now.
Flipper2058 profile picture
"The market is willing to issue second lien debt, therefore it should be willing to refi first lien debt."

I call this the "leapfrog" stage. Creditors trying to upgrade over others to get security and control. As a firm gets worse leapfrogging hits fever pitch. Some of the oil and gas firm offered 1.5 lien....3rd lien...etc.

I just watch for for these things as signs to how the market is accepting them, I am not saying they will happen, I hope not.

I own long JCP bonds. I won't get into sweet deals because most are QIB 144A paper only. So my only defense is buying the longest cheapest bond I can find and hope all the leapfrogging stops and the firm repairs itself. The maturity is meaningless.
Thank you for this write-up. We’ve all probably seen this movie before - rearranging deck chairs on the Titanic. Mgmt must increase revenue or cut more fat otherwise rising rates crush this business. Kudos to whomever the banking team was that pulled this off - ultimately 2nd lien cramdowns NEVER feel good in a consumer retailer with limited hard assets. Hopefully there’s locked up value in real estate from closing locations.
Landlord Investor profile picture
The Titanic sunk in a matter of hours. JCP is good until at least 2023. How many high yield rated companies can say that?

Also, rising rates only impact their variable rate debt. An extra percent on their term loan isn’t going to break them. Good thing they fixed a big chunk of their debt until 2036 and another big chunk at 2097.
Landlord Investor profile picture
The Titanic sunk in a matter of hours. JCP is good until at least 2023. How many high yield rated companies can say that?

Also, rising rates only impact their variable rate debt. An extra percent on their term loan isn’t going to break them. Good thing they fixed a big chunk of their debt until 2036 and another big chunk at 2097.
equitydeepvalue profile picture
sesneless abandon - "rearranging deck chairs on the Titanic" wow lmaooo i didnt know you were a SAVAGE
xamd profile picture
Sorry to nitpick, but great typo.
Reducing the outstanding balance on its term loan to 900 billion, I dont see how they can pay that back, even by 2097.

Good article, even if things seem a bit bleak with these actions. You have put it in plainer language so that I understand what they are doing.

Biological profile picture
Thank you; this is a prudent perhaps even prescient move. I am long KTP (from when it hit lows of about $11 or $12 some months ago). I added after the recent 6% drop at $14.48.
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