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J.C. Penney's Feet to the Fire

In February, law firm Brown Rudnick LLP, claiming to represent more than 50% of the $325 million of 7.4% debentures due in 2037, notified J.C. Penney that the company had breached covenants by drawing down its asset-backed lending revolver. This time, J.C. Penney went on offense and asked a judge to declare that no covenants had been tripped. Shortly afterward, the debtholders, who had never been identified, dropped their claim without explanation, although one person with knowledge of the dispute said it was "because they were just plain wrong."

J.C. Penney said in its 10-K filing that its tangible assets to senior funded debt was 304% at the end of 2012. The company also has an indenture covering its $255 million of notes due in 2023 requiring it to have a minimum of 200% net tangible assets to senior funded indebtedness. This means that the company might not be able to fully withdraw its ABL revolver without dropping below the 200% number.

Carol Levenson, director of research at Gimme Credit LLC, said that with the current tangible asset-to-debt ratio, J.C. Penney should have as much as $1.2 billion in additional headroom before it tripped any covenants.

One thing the company does have going for it when it comes to debt is that its maturity profile is somewhat manageable. While the amount is sizable, no debt is due until October 2015 when $200 million of 6.875% senior notes mature. An additional $200 million of 7.65% debentures are due in August 2016.

In addition to the company's bonds, J.C. Penney has $1.85 billion in borrowing capacity through the revolver over which the debenture holders were allegedly upset. The revolver was originally arranged with a size of $1.25 billion and increased to $1.75 billion in January and then to $1.85 billion in February.

Written by Richard Collings in New York. Jamie Mason and Jonathan Schwarzberg contributed to this report.

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