Retail watch ......
Walmart sees unsold merchandise piling up at its stores ......
Wal-Mart clearly has issues beyond inventory control.
You can't help but laugh at this: "A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1."
Rather than send a message "penguins will go for $1.00 in January", Wal-Mart would be better of dumping them in the trash bin (where they arguably belonged even in October).
Nonetheless, Wal-Mart said it was adding 35,000 permanent workers and increasing the hours of an additional 35,000, as well as hiring 55,000 seasonal workers.
That seems like a lot of hiring for a company struggling with sales.
Some of Wal-Mart's problems are undoubtedly related to under-staffing, but most of the problems appear to be weak sales. And that problem can hardly be unique to Walmart.
Tough Holiday Season?
Here's the curious statement "U.S. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak"
An allegedly "tough" holiday season is supposed to have 2.4% growth?!
I will take the under. But if sales do go up by that much, then massive as well as profitless unloading of junk at bargain prices will be the reason.
Mike "Mish" Shedlock
http://www.zerohedge.com/news/2013-09-26/jcpenney-throws-cnbc-under-bus-says-ceo-was-misquoted
( HA HA HA ! )
Submitted by Tyler Durden on 09/26/2013 21:46 -0400
Submitted by Tyler Durden on 09/26/2013 17:08 -0400
Submitted by Tyler Durden on 09/24/2013 20:51 -0400
and......
Submitted by Tyler Durden on 09/26/2013 06:40 -0400
Walmart sees unsold merchandise piling up at its stores ......
Thursday, September 26, 2013 12:50 PM
Unsold Merchandise Piles Up at Wal-Mart; Cuts in Orders Will Follow
What happens at Wal-Mart this holiday season will likely happen at many prominent retailers.
The Wal-Mart story is not pretty: Wal-Mart Cutting Orders as Unsold Merchandise Piles Up.
The Wal-Mart story is not pretty: Wal-Mart Cutting Orders as Unsold Merchandise Piles Up.
Wal-Mart Stores Inc. (WMT) is cutting orders it places with suppliers this quarter and next to address rising inventory the company flagged in last month’s earnings report.Other Issues
Last week, an ordering manager at the company’s Bentonville, Arkansas, headquarters described the pullback in an e-mail to a supplier, who said others got similar messages. “We are looking at reducing inventory for Q3 and Q4,” said the Sept. 17 e-mail, which was reviewed by Bloomberg News.
Inventory Goal
Wal-Mart has said in filings that its “corporate goal” is “growing inventory at or less than the rate of net sales growth.” For its U.S. segment, the company has hit that goal only twice in the past 10 quarters, according to data compiled by Bloomberg News. The last time was four quarters ago.
In the second quarter, U.S. inventory grew at 6.9 percent and U.S. sales grew at about 2 percent. In the same quarter a year earlier, inventory increased 3.6 percent while sales rose 3.8 percent. Target Corp. (TGT) stores and Dollar General Corp. (DG) held their second-quarter inventory gains to about twice the rate of sales growth versus triple the pace at Wal-Mart.
Inventory Increase
Bill Simon, chief executive officer of Wal-Mart’s U.S. division, said last month that inventory increased due to “softer than anticipated sales trends, the delay in summer weather and timing shifts in the receipt of merchandise for back-to-school and the upcoming holiday season.”
Even as Wal-Mart seeks to clear its inventory, holiday merchandise is showing up early at stores in states including Illinois, Texas, California and Colorado, according to workers at those locations. Some of them said there is already insufficient room for existing merchandise, forcing them to put the seasonal goods out as soon as they arrive -- about a month earlier than usual.
At a store in Boothwyn, Pennsylvania, on Sept. 14, pallets of Christmas tree lights sat in the middle of an aisle beside dozens of unopened cardboard boxes of Halloween decorations. A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1.
It’s a similar scene in Hurst, Texas, said Donna Kennedy-Medford, who has worked at the store for two years.
“This year, there’s more earlier than last year,” she said of the Christmas items. “We have some of it in the back, and some of it has been put out on the floor in a haphazard fashion.”
Wal-Mart is already struggling to keep shelves stocked, in part because stores lack the manpower to move items to sales floors from back rooms and shipping containers in parking lots. The U.S. workforce at Wal-Mart’s namesake and Sam’s Club warehouse chains fell by about 120,000 employees in the past five years, to about 1.3 million, according to regulatory filings. In that time, the company has added more than 500 U.S. stores through July 31.
Seasonal Merchandise
Because back rooms are often full, seasonal merchandise such as Christmas decorations sometimes must be moved directly to the sales floor, said Barbara Gertz, who has worked as an overnight stocker at the Wal-Mart store in Aurora, Colorado, for almost five years.
“The aisles in the back room are so backed up with stuff,” she said. “We brought three pallets of Christmas trees out to the garden center. We usually do that in mid-October. We’re filling it up pretty quick for only being mid-September.”
Unloading Sweatpants
That’s the case at Kennedy-Medford’s store in Texas, where kids’ clothes have sold for as little as 25 cents, she said.
“Just to get rid of things, a lot of stuff is going for a dollar,” she said. “Sweatpants that used to be $8.96 are going for $2 just so we can unload them.”
Wal-Mart clearly has issues beyond inventory control.
You can't help but laugh at this: "A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1."
Rather than send a message "penguins will go for $1.00 in January", Wal-Mart would be better of dumping them in the trash bin (where they arguably belonged even in October).
Nonetheless, Wal-Mart said it was adding 35,000 permanent workers and increasing the hours of an additional 35,000, as well as hiring 55,000 seasonal workers.
That seems like a lot of hiring for a company struggling with sales.
Some of Wal-Mart's problems are undoubtedly related to under-staffing, but most of the problems appear to be weak sales. And that problem can hardly be unique to Walmart.
Tough Holiday Season?
Here's the curious statement "U.S. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak"
An allegedly "tough" holiday season is supposed to have 2.4% growth?!
I will take the under. But if sales do go up by that much, then massive as well as profitless unloading of junk at bargain prices will be the reason.
Mike "Mish" Shedlock
J.C. Penney ......
( HA HA HA ! )
JCPenney Throws CNBC Under The Bus, Says CEO Was "Misquoted"
As we pointed out earlier, today the investing public was witness to perhaps one of the most epic (and backfiring) media PR clusterfucks in history.
The key culprit it seems was CNBC, which reported on live TV just after 10:30 am that JCP "will not need to raise capital now", refuting an overnight Reuters story which sent the stock to the mid-$8 level in the premarket, and which as Reuters observed led to a jump in J.C. Penney shares of "18 percent from their early morning low after CNBC reported Ullman's comment" as seen below:
- 1042ET - *JCP'S ULLMAN:DOESN'T SEE NEEDING TO RAISE LIQUIDITY THS YR:CNBC
- 1044ET - *JCP CEO: DON’T SEE NEED TO RAISE LIQUIDITY THIS YR: CNBC
... which was either the result of live TV anchors reporting a false story posted earlier on the CNBC website (also confirmed by Reuters and WSJ) or someone at CNBC quoting a "source" during the live broadcast.
As is now known, this was a complete fabrication, only to be followed a few short hours later with an announcement by JCP that it would in fact proceed with an equity offering of up to $1 billion (with Goldman as lead underwriter). And naturally, it was only a matter of time before lawyers started making phone calls, and before someone got implicated in what in retrospect can be construed as very serious, and costly, 10(b)-5 securities fraud.
As it turns out, that someone is CNBC itself,which was just thrown under the bus by the very company it rushed to defend.
Moments ago Bloomberg reported, that "J.C. Penney Says CEO Ullman Misquoted on Capital Raise" adding that "Comments purported to be made by Ullman in “media articles” don’t reflect “any recent comment,” JCP says in e-mailed statement."
In other words, JCPenney accuses CNBC of lying.
What is ironic is that JCP did not "notice" the allegedly false CNBC comments until well after the close, and well after the stock dilution announcement. Apparently JCP had no problem with CNBC "misquoting" its CEO when it resulted in a 10% surge in the stock in the moments after the announcement when countless shorts were forced to cover on false and misleading reporting and "news." It was only after said quote was directly refuted by the facts that it became a problem.
The problem for JCP (and CNBC now apparently) is that there are many traders who lost lots of money (on both the way up and down, especially since another CNBC reporter just announced that the JCP offering will price in the $9.35-$9.75 range) and now, with definitive evidence that someone lied, are already retaining legal counsel with full intent to see their losses recouped. Did we mention that at 122 million shares changing hands, it was the highest volume day in JCP stock ever ? Well it was.
The question is: who will be the guilty party. Was it JCP's Ullman who indeed lied that the company "will not need to raise capital now", when in reality it did? Or did CNBC intentionally, for whatever reason, misquote the CEO, potentially to benefit one or more affiliated investing parties, in order to potentially generate a short covering spree on false news?
In light of our sincere appreciation of both of these organizations, we can't wait to find which one, or both, organizations end up in court paying millions to defrauded investors.
And we certainly can't wait to see how the SEC will get involved in this latest humiliation for US equity capital markets. Because at least superficially, we don't see a reason why Mary Jo White would need to recuse herself from this particular enforcement/criminal action, at least this one time.
and.....
http://www.zerohedge.com/news/2013-09-26/surprise-jcp-sells-84-million-shares-goldman-sachs-stock-slides-again
So Many Lies, So Little Time: JCP Sells 84 Million Shares Via Goldman Sachs Hours After Telling CNBC It Won't Sell Equity
Remember when one after another JCPenney executive lined up earlier today, mostly using that damage control TV outlet known as CNBC, to promise that JCP does not, repeat not, need emergency public equity funding?
Here is CNBC explaining the news... that no capital is needed...
Well, guess what. They lied. Is this criminal? Surely the SEC will get involved immediately.
- J. C. PENNEY ANNOUNCES PROPOSED PUBLIC OFFERING OF COMMON STOC
- J. C. PENNEY COMMENCED PUBLIC OFFERING OF 84 MILLION SHARES
And the punchline:
- JC PENNEY TO OFFER SHARES VIA GOLDMAN SACHS
Yep: the same firm that just killed JCP two days ago, is now diluting the stock some more.
Oh and yes. Remember what we pointed out onTuesday:
Before we get into the nuances of the report (which for those who have read our extensive coverage on the name will be nothing new), here are some of the more amusing, and confusing, aspects of the Disclosure section:
- Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the month end preceding this report: J.C. Penney Company
- Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: J.C. Penney Company
We now know just what services.
From the press release:
J. C. Penney Company, Inc. (NYSE: JCP) (the “Company”) announced today that it has commenced an underwritten public offering of 84.0 million shares of its common stock. The Company intends to use the net proceeds from the offering for general corporate purposes.The Company intends to grant the underwriters a 30-day option to purchase up to an additional 12.6 million shares of common stock. The Company’s common stock is listed on the New York Stock Exchange under the symbol “JCP.”
So add 96.6 million shares to the existing 220.6 million shares outstanding and you get 44% dilution.
Adding insult to monkeyhammering, JCP just lost its Controller.
J.C. Penney Co Inc (JCP) said on Thursday that Mark Sweeney has left the company after serving as senior vice president and controller for just over a year, and that it has named Dennis Miller, who was controller before Sweeney, as its interim principal accounting officer.The department store operator, which is under pressure to improve its business quickly, did not say why Sweeney left Penney on September 20. He was appointed controller on September 5, 2012.Miller, 60, currently oversees Penney's shared services center in Salt Lake City and was Penney's senior vice president and controller from June 3, 2008 until September 5, 2012.
Luckily, worthless companies do not need a controller.
Finally, for everyone who still doesn't get it,here it is again from April:
Follow the bouncing balls here.....
Goldman Goes Medieval On JCPenney: Shorts Bonds; Slams Liquidity; Expects Default Risk Surge
- Bond
- CDS
- Covenants
- Creditors
- default
- fixed
- Goldman Sachs
- goldman sachs
- JCPenney
- Lehman
- Lehman Brothers
- Market Conditions
- Monetization
- Real estate
- recovery
- Secured Debt
Back in April, in a desperate scramble to raise liquidity courtesy of a hail mary Goldman syndicated term loan, we penned "Confused By What Is Going On At JCP? Here's The Pro Forma Cap Table And The Cliff Notes", where in addition to the obvious - that this is merely buying a few months for the melting icecube company which with every passing day is closer to a Chapter 11 (or 7) bankruptcy filing - we also laid out that what Goldman was doing was merely positioning itself to be at the top of the company's capital structure with a super secured and overcollateralized credit facility, through what is effectively a pre-petition DIP. Of course, if that was the case, then after a certain period of time Goldman was actively start agitating to destabilize JCP in a way that slowly but surely (or rapidly and even more surely) pushed it into bankruptcy before even more collateral/assets was wasted away. As it turns out we only had to wait for five months before the same Goldman that raised the company's emergency liquidity term loan turned around and launched a vicious attack on the same company that paid it millions in dollars in underwriting fees.
Specifically, what Goldman just did is write a report (perhaps one of the best bearish cross-asset investment theses we have seen to come out of the firm in a long time) in which it laid out, in a lucid and compelling manner, why JCP is doomed. The report is titled appropriately enough: "Initiate on JCP with Underperform: Looking for cash in the name"... and not finding it. Furthermore, not only is Goldman saying the company's unsecured bonds are impaired, with a recovery on the tranche reaching as low as 13% in a liquidation bankruptcy scenario or as "high" as 65% in the best case going concern outcome (which also suggests the equity is pretty much worthless) but is advising clients to buy either 5 Year CDS (with expectations of a near term blow out in default risk) or alternatively a CDS steepener (sell 1 Yr, buy 5 Yr).
But before we get into the nuances of the report (which for those who have read our extensive coverage on the name will be nothing new), here are some of the more amusing, and confusing, aspects of the Disclosure section:
- Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be aggregated under US securities law) as of the month end preceding this report: J.C. Penney Company
- Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: J.C. Penney Company
In other words, Goldman is now actively trying to destroy the value of its equity investment in JCP. Obviously, the firm would not be doing this unless it had some other motive at hand. Namely: to offset equity losses through other means, be it more investment banking fees (for which it intends to be compensated in the next three months), or from cap structure arbitrage. Because nothing helps forget an equity wipe-out, like a blockbuster CDS blowout from 1000 bps to several thousands basis point wider. In fact, the more dramatic the bankruptcy, the greater the return. It is precisely the CDS that Goldman is now long, in what is a bet that the end for JCP is nigh.
Going back to the report, here is how Goldman frames the endgames for JCP:
We initiate on JCP’s 7.95% unsecured bonds due 2017, its 5.65% notes due 2020, and its 6.375% notes due 2036 with anUnderperform rating. We recommend that investors buy 5-year CDS, and also recommend a steepener, whereby investors sell 1-yr CDS and buy 5-yr CDS. Additionally, although we are comfortable with the collateral value at the top part of the structure, in our view, the company’s term loan could experience downside if the company were to tap the debt markets for incremental liquidity as discussed below. As a result, we are waiting for a better entry point on the term loan. JCP is now in our HY coverage.
Of course Goldman is right that should JCP raise more funding (and as Goldman lays out further on, the most likely source of cash is a 2nd Lien), it would impair the existing secured Term Loan: a Term Loan which is likely still mostly on Goldman's own books. Which is why it is in Goldman's interest that JCP does not dilute the corporate collateral any more, and proceed straight to Chapter 11 (or better yet, 7). After all, as Goldman notes, even in a worst case scenario the term loan is fully covered (that remains to be seen).
The reason why Goldman is coming to the public now with its bearish thesis, is as follows:
In our view, a combination of weak fundamentals, inventory rebuilding, and an underperforming home department will likely challenge J.C. Penney’s liquidity levels in 3Q. In order to safeguard against a potentially poor 4Q holiday season, it is likely that management will look to build a bigger liquidity buffer, as has been suggested by recent press reports. Although we believe this would be a prudent measure for the company, given our expectation for new capital to come in the form of additional debt (rather than equity), we believe this will be a negative catalyst for creditors.
Especially those creditors who bought the Goldman syndicated term loan (the part that Goldman was able to offload from its balance sheet).
So what happens next if Goldman is right? First CDS blows out to fresh wides, which means at least 300 bps of imminent widening as the company attempt to conduct a new secured leveraging transaction.
Goldman continues:
With this as a backdrop, we recommend investors put on a steepener (sell 1-year CDS and buy 5-year CDS), based on the view that the company has some liquidity triggers available that should enable it to extend its life, but that it will continue to encounter a difficult fundamental backdrop within which to effect a turnaround. Liquidity triggers include:
- Sell fringe land (est. value: $100mn)
- Sell tire, battery, and automotive locations (est. value $115-135mn)
- Sell mall partnership interests (est. value $100-150mn)
- Tap debt markets for $500mn of incremental second lien bank loan or bonds (est. value $500mn)
- Raise equity (up to $1bn)
- Monetize portion of its below-market leases (up to $400mn)
But it is what comes next that is the biggest kick in the groin of the company's recent (and soon to be future) client: Goldman's tongue in cheek discussion of JCP's bankruptcy.
Finally, although we believe handicapping a bankruptcy filing for JCP is premature, we do believe that understanding likely recovery values in the event of a bankruptcy is an important exercise. To that end, we view the term loan as the safest liquid instrument in the capital structure given our base case of a par recovery. We expect recovery on the unsecured bonds to range from 47-65%. However, under the scenario where the company issues $500mn of incremental secured debt, the recovery range would fall to 35-54%. We provide a full recovery waterfall later in this report.
Before Goldman discloses its waterfall residual value analysis, it naturally has to make sure that at least the term loans are not impaired in even a worst case scenario. While it can't explicitly do that, it goes as close as possible.
In Exhibit 3, we compare JCP’s secured term loan to other term loans in the space that are secured by real estate. As discussed in a later section of this report, we think that JCP’s real estate collateral offers ample coverage for the loan. However, we are looking for a better entry point. We think that JCP’s term loan could see near-term weakness if the company were to issue a 2nd lien bond with a pledge on the ABL collateral. At a price (ask) of $98.5, the JCP term loan yields 6.4%. This compares to the Toy Delaware term loan, which trades at $96.5 and yields 6.1% and Toy’s Propco I unsecured term loan, which trades at par and yields 6%. We think it is appropriate for JCP to trade wide to Toy Delaware and Propco, and think this relationship could widen slightly. Although we acknowledge that JCP has some liquidity triggers at its disposal we think that JCP would likely encounter liquidity difficulties prior to TOY (Toy still generates positive free cash flow).
We disagree with Goldman that the JCP Term Loan is money good: in fact, in even a simple Chaper 11 with DIP, it is quite likely that the term loan will end up being the fulcrum security, but that is a bridge we will cross when we get to it. For now, the question is what options the company has in order to raise near-term liquidity when things once again turn out worse than expected. There aren't many.
While J.C. Penney pledged the vast majority of its real estate assets to its term loan, it still has some liquidity levers left. Additionally, in fiscal 2012, the company incurred a federal net operating loss (NOL) of $1.5 billion of which approximately $284mn was carried back. The remaining $1.2 billion carry-forward (expiring between 2013 and 2032) is available to offset future taxable income. As a result, the tax implications of any asset sales should not be onerous. Below we provide a list of potential triggers divided between “simple” levers and those that would likely prove more complicatedLiquidity triggersSell fringe land (est. value: $100mn): JCP owns 240 acres of vacant land surrounding its headquarters in Plano Texas. This fringe land is not part of the term loan’s collateral package. In 2011, when JCP began marketing the land, the Collins County Appraisal District appraised it at $150 million. Given that JCP has not yet sold the land, it is possible that its actual market value may be below appraisal value. We assume a 30% haircut and estimate potential proceeds of $100mn. We note that the credit agreement allows JCP to contribute fringe land to a joint venture for the purpose of developing it. As a result, JCP may choose to develop the land to garner a higher value; therefore it is not clear that monetization of fringe land is a near-term liquidity lever.Tire, Battery, and automotive locations (est. value: $115-135mn); J.C. Penney owns 30 tire, battery, and automotive locations that are not pledged as collateral. Assuming an average store size consistent with history, the square footage of these locations would total 2.5-3.0mn. Assuming a valuation of $45/square foot (JCP’s assets have a lit appraisal value of $55-60/square foot) translates to $115-135mn valuation.Regional mall partnership units (est. value: $100-150mn); J.C. Penney owns 8 regional mall partnerships that they could monetize. Last year, they sold one for $65 million. The company has not provided information about where the mall partnerships are located.Issuing an additional $500mn of bank loan or bonds ($500mn);The company’s ABL has a $400mn accordion. Its bank loan has a carve-out for $500mn of “debt issued under the ABL credit agreement”. The company would have the ability to issue new debt with a second lien on the inventory that comes ahead of the term loan but behind the ABL. We think that it would be difficult for the company to issue incremental ABL because its current ABL has a clause that could require the company to reprice its existing ABL, making it a costly option.Equity raise (est. value: up to $1 bn); According to Bloomberg, JCP’s top five equity holders own almost 50% of its equity. If equity holders are confident that JCP can re-attract its customer base, they may be willing to commit more capital in the form of backstopping a rights offering, a convertible, or an outright incremental equity offering. We’ve listed these in order of our view of probability.
That said, and here we do agree with Goldman, the most likely option for JCP is more secured debt in the form of a Second Lien.
... we conclude that secured debt is the most likely near-term liquidity lever for the company. Although unsecured issuance is possible, with outstanding debt trading at double-digit yields, it is unlikely that the company would be able to issue at palatable levels. This leaves us with secured debt as the most likely liquidity lever for the company nearterm. Here the company’s options are limited by the term loan credit agreement. Our reading of the credit agreement suggests that the only available carve-out for secured debt that is raised for the purpose of putting cash on the balance sheet is a carve-out for indebtedness under the ABL credit agreement up to $2.35bn. This provides the company with room for an additional $500mn of ABL debt. Although the ABL credit agreement provides for a $400mn accordion, our understanding of the covenants suggests that the company would need to re-price the entire ABL to take advantage of this. As a result, we believe it is most likely that the company would issue a 2nd-lien instrument backed by ABL collateral.
Which then brings us to the meat of the matter: Goldman's bankruptcy "waterfall" residual value analysis, which unfortunately for the bondholders, and certainly the equity, runs dry about half way through:
Based on our recovery analysis, JCP’s bank loan and ABL would recover par (plus postpetition interest) under each scenario and its unsecured bonds would recover 47-65% under two of three scenarios, and 15% under a full scale liquidation, which we view as unlikely. The scenarios are discussed below.However if the company were to issue bonds that have a 2nd lien on inventory, our waterfall suggests that this would reduce unsecured recovery by 11-12pts, leading to an estimated recovery of 35-54% under Scenario 1 and 2. If the JCP were also to grant new debt an unsecured guarantee on its guarantor subs, it could reduce the recovery potentially more. Because the real estate collateral is sufficient to cover the bank loans in most cases (except dark value appraisal), the pledge of second lien on inventory is less onerous to the bank loan than to the unsecured bonds. In terms of the bank loan, $3.2 billion of assets are pledged to cover $2.25bn of term loan. The collateral value would have to fall by $950mn, or approximately 30% before the term loan recovery even relied upon inventory value.As shown in Exhibit 7, the bank loans are issued by J.C. Penney Corporation Inc., and are guaranteed on a senior secured basis by J.C. Penney Purchasing Corporation, JCP Real Estate Holdings, Inc., and J.C. Penney Properties, Inc. The company’s unsecured bonds are co-issued by J.C. Penney Corporation, Inc. (OpCo), and J.C. Penny Company Inc. (Holdings) and have no subsidiary guarantees.
For those curious about the intercreditor nature of the Org Chart linkages, you are in luck - it is shown below, although...
... it is largely irrelevant. Once the pre-bankruptcy filing tailspin begins, the only constant will be utter chaos as every stakeholder in the ungainly capital structure scrambles to generate whatever recovery they can. Which again, won't be much:
We considered three scenarios in estimating the recovery values for JCP debt:Scenario #1: Going concern with no DIP loan. In this hypothetical scenario, we postulate that CEO Ullman could choose to file the company earlier than absolutely necessary given a higher level objectivity (he was brought in to fix an existing problem). However, under a scenario where traffic, conversion, and margins do not improve, and cash levels fall below what we view as a $500mn minimum threshold, if he has already pulled the “simple” liquidity triggers, it is possible he may file it and restructure it as a going concern. This scenario assumes that he files the company with $450 million of cash on its balance sheet and a fully drawn ABL (minus $125mn because if ABL availability falls below this level JCP becomes subject to a 1.0x fixed charge covenant requirement). Because of the cash on its balance sheet, we assume that the company files without a DIP loan. We think it is most likely that JCP would operate as a going concern if it were to restructure. Generally, the most important factor in identifying retailers who have reorganized as a going concern has been their ability to access new capital (rights offerings, new debt put in place at emergence). Many of the retailers that liquidated did so in the tight credit years of 2008-2009, which are not representative of current market conditions.Scenario #2: Going concern with DIP loan. In this hypothetical scenario, we examine the scenario where CEO Ullman runs cash down to minimal levels in hopes that he can save the company with a longer liquidity runway. Because of these minimum cash levels, a DIP would be needed to fund working capital needs and other expenses. We postulated that the company would need an $800mn DIP. In this scenario, the term loan is still not garnering any of its par recovery value from its 2nd lien on inventory.Scenario #3: Liquidation and no capacity for DIP: In this hypothetical scenario we assume that the company files when cash levels fall to $500 million but that it is a liquidation scenario. Because we are using dark store appraisal values, the company does not have capacity for a DIP (any DIP would result in the impairment of the term loan and ABL). Given our view that JCP would continue as a going concern, we think this scenario is the least likely of the three scenarios, and give it little weight in our ultimate assessment of unsecured recovery values.
There is more but this is the gist: the countdown to a filing has begun, because once Goldman uses the words "waterfall analysis" and invokes the dreaded "filing" word there is no turning back. We only wonder if Goldman waited until Bill Ackman was out before it issued this report, which objectively gives the company 6-9 months.
Aside from that, our only question is whether JCP will be just another Movie Gallery: yet another sterling Goldman debt deal, that resulted in a bankruptcy before even one coupon could be paid. It will take some special talent for JCP to overtake Movie, but Goldman has been known to do even more impossible things in the past (see: Lehman Brothers).
and......
Piling On The JCPain: Citi Lowers JCP Target To $7, Questions "Adequate Cash For 2014/15", Sees $1/Share Floor
Yesterday, it was Goldman which (paradoxically, considering the firm's role in the recent Term Loan underwriting) took the axe to JCP securities, both bonds and stocks. Today, following news that JCP is considering a $750MM-$1Bn equity raise (of course it is - it is considering every possible option, including asset sales, a second lien and of course, a bankruptcy) which we believe if anything would be in the form of a rights offering as we commented yesterday...
Dang I like shopping at JC Penny, maybe they will pull through. Interesting about Walmart.
ReplyDeleteWould love to see a coup in Greece.
Kev , the JC Penney thing is just nuts ! WTF - how could they lie about doing a secondary and later the same day .. do a fricking secondary offering ?
ReplyDeleteGreece coup - give it a little more time - I consider what we saw today as a military trial balloon to the Pols to get their act together or else !