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JC Penney files for bankruptcy

Retailer looks to form new company and REIT to help it emerge from Chapter 11.

Clothing and home goods retailer JC Penney announced late last week that it filed for bankruptcy protection, according to The New York Times and multiple news outlets. The retailer had suffered declining sales during the last two decades, which only got worse during the recent COVID-19 outbreak.

“The Coronavirus pandemic has created unprecedented challenges for our families, our loved ones, our communities, and our country,” JC Penney CEO Jill Soltau said in a statement. “As a result, the American retail industry has experienced a profoundly different new reality, requiring JC Penney to make difficult decisions in running our business to protect the safety of our associates and customers and the future of our company. Until this pandemic struck, we had made significant progress rebuilding our company under our Plan for Renewal strategy – and our efforts had already begun to pay off.

“While we had been working in parallel on options to strengthen our balance sheet and extend our financial runway, the closure of our stores due to the pandemic necessitated a more fulsome review to include the elimination of outstanding debt.”

JC Penney is not the only retailer to suffer bankruptcy during the COVID-19 pandemic. J. Crew and Neiman Marcus also filed for bankruptcy. JC Penney is the biggest retailer to fall during the health crisis however—the company has more than 800 stores and 85,000 employees and serves as an anchor in malls across the United States.

The retailer said it has $500 million in cash on hand and received commitments for $900 million in financing to use during the bankruptcy process. The company also said it made a deal with lenders that would decrease several billion dollars of its debt and explore a sale. JC Penney will also close 240 of its stores—approximately 192 stores in February and another 50 in 2022, according to CBS News. The closures will leave the retailer with a little more than 600 stores.

JC Penney to turn properties into separate REIT

JC Penney is already working towards overcoming its bankruptcy filing. The retailer plans to spin its real estate into a publicly traded REIT (real estate investment trust) that would collect rent from retail businesses, according to CNBC and other news outlets. Penney also plans to reorganize and become a new retailer, JCP. An approximate 35 percent stake in the new REIT could be sold to a third-party investor to raise capital or provide more funding for the REIT, according to court documents. The company is looking to list common stock of JCP and the REIT on a national securities exchange, “as soon as reasonably practical.”

The retailer also plans to do sale-leaseback deals for its distribution centers to help raise more cash, CNBC reports. This type of transaction involves selling real estate and leasing it back-retailers like Macy’s, Big Lots and Bed Bath & Beyond have taken part in this practice to generate cash quickly.

Kirkland & Ellis attorney Joshua Sussberg said JC Penney’s unencumbered real estate value is $1.4 billion when the store’s open and $704 million when it isn’t during a virtual court hearing on May 16.

“JC Penney now finds itself facing another monumental challenge to its business: emerging from the disruption caused by the novel Coronavirus pandemic,” CFO Bill Wafford said in his court declaration.

The retailer has until July 15 to create a business plan and hit certain milestones to get the entire bankruptcy financing package or else look for a sale.

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