An out-of-court restructuring would do little to help J.C. Penney work out of its troubles, as it would be limited to restructuring debt. One option would be to issue new shares in the company and swap them for debt, but that would require approval by shareholders and is, therefore, hard to pull off.
"There's no out of court in this situation," Tawil said. Of course, when Linens Holding and Circuit City filed for bankruptcy during the fallout from the 2008 financial crisis, the pendulum had swung strongly in favor of lenders, and not only were covenants more onerous, but interest rates could be as high as Libor plus 1000, Tawil said.
In some cases if there are assets and/or a solid turnaround plan, since lenders are eager to advance money, DIP financing may be more feasible. But J.C. Penney has already collateralized all of its real estate and has few assets left that would be attractive to would-be lenders. The department store chain would be at the mercy of its existing lenders, which might choose to provide a minimal amount of additional financing, perhaps $100 million, but only in exchange for extra protections on existing loans, Tawil said.
One thing is for sure: Unless J.C. Penney slows its cash burn, it will have to do something drastic. In July, Moody's Investors Service calculated J.C. Penney would burn through $1.4 billion in cash by year's end, but in just the second quarter the retailer said it had spent more than $700 million, beating analysts' expectations on the downside.Comparable store sales sunk another 11.9% in the second quarter, on top of sinking 21.7% for the same period a year ago and over 25% for all of fiscal 2012. Its only assets left to monetize in order to fund operations are its Liz Claiborne and Monet brands, which it acquired for $268 million from Liz Claiborne Inc., now known as Fifth & Pacific Cos., in 2011. J.C. Penney said it expects to end this year with about $1.5 billion in liquidity. -- Written by Leon Lazaroff in New York
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