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Home / Business / I am in Awe of How Long Zombies as J.C. Penney Keep gets new money to burn. But bankruptcy angles

I am in Awe of How Long Zombies as J.C. Penney Keep gets new money to burn. But bankruptcy angles



In 2013, I called Goldman Sachs to a "snake oil salesman" to sign a $ 1 billion J.C. Penney action exchange. Investors were wiped out. Now the bonds, including a 100-year bond that has collapsed.

J.C. Penney, who only took a new step towards what will eventually become a bankruptcy and probable liquidation of the company, can be summarized as follows: 860 shops, down from 1100 stores in 2011;

  • 95,000 employees;
  • $ 4 billion in debt, with some coming due later this year and more coming due over the next few years,
  • $ 12 billion in annual sales down from $ 17 billion in 2011;
  • $ 5 billion in accumulated net losses since 2011
    . [19659008] Sources have told Reuters that the company has employed recruitment advisors. The consequence of hiring restructuring advisors is always this: If the company cannot bully its creditors for an agreement on a debt reconstruction that is likely to cost them dearly, it will lead to bankruptcy. It is this threat of bankruptcy that hangs over creditors who can motivate them to accept losses through negotiation, rather than having a bankruptcy court decide their fate.

    But even after a debt reconstruction, a zombie like JC Penney will probably fail a year or two later. Retailers are notoriously difficult to restructure. Most of them end up being liquidated. When a stored brand like JC Penney fails, it is not due to a slip-up but due to years or even decades of poor management and inability to adapt to a changing environment – thereby killing the mark.

    On the news today, JC Penney's shares [JCP] doubled 17%, from almost worthless to worth even less, now at $ 0.90.

    What is surprising is not that this happens. Department stores have been completely destroyed by e-commerce. Chains, including biggies Sears and Kmart, and Bon Ton Stores, which failed the transition, have already been dismembered as part of the brick melting.

    But I am in awe of how long Zombie companies such as JC Penney continue to get new money from investors who believe in the Wall Street hype and then get ripped off.

    So here is the JC Penney example of how Wall Street units, in this case Goldman Sachs, have conspired with the company to tear off investors. Back in 2013, when I was still quite new with my financial website and still used angry but technically correct terms that I might not use today in my now gentler and milder way, I wrote an article – "JC Penney and Goldman: Lies , Scams, and Rip-Offs "- which started this way:

    Why would anyone buy this shit? No, not the clothes in JC Penney's stores – which virtually no one buys – but the shares it just sold.

    Tsk, tsk, tsk, wash your mouth with soap, Wolf … And then this:

    The hired Goldman Sachs as underwriter – snake oil salesman would be a more appropriate period – and offered to sell 84 million shares at $ 9.65 per share and gave Goldman a 30-day opportunity to buy up to 12.6 million more shares, for a total of 96.6 million shares. The deal will increase up to $ 932 million.

    The stock offer was secretly planned. And the day before the announcement of the stock sale, and to pump up the stock price ahead of it, CEO Myron E. Ullman III, fully involved in the stock sale the next day, said he didn't anticipate a situation this year when "we needed liquidity."

    Lies, groin, groin. That's what keeps zombies funded.

    Yup, in September 2013, JC Penney, with the help of Goldman Sachs, who was heavily paid for this, could receive an additional $ 1 billion from new investors via a $ 9.65 share dividend. This money from new investors bailed out old investors and kept the zombie alive, allowing it to refinance its overdue debt in subsequent years, and allowing it to lose the rest of the above $ 5 billion.

    But investors who bought these shares during the misunderstood stock offer in September 2013 did not have to wait so long before they were cleaned out. The investment is down to 91%.

    Now we come closer to the end. Another stock sale is out of the question. The refinancing of the debt that is due is probably also out of the question. Everyone knows: It is now the creditor's turn to lose money, either in bankruptcy or outside.

    Moody's prices JC Penney Caa3, just a few notches above standard, Moody's & Fitch's. The news in the debt reconstruction is likely to cause Moody to set up his ears. A debt restructuring, even outside the bankruptcy law, is generally regarded as a default situation.

    J.C. Penney has had discussions with restructuring specialists – lawyers and investment bankers – for weeks, some of Reuters said. One of the sources said that the restructuring discussions are at an early stage. The goal is to find ways to restructure debt and raise new money to bail out old investors. This would keep the zombie alive a little longer. Creditors will be motivated by the threat of bankruptcy proceedings over their heads and they will choose.

    Regarding the bonds included in JC Penney's $ 4 billion in long-term debt, there are a number of things out there, some wild things as well.

    For example, in the wilderness, in 1997, JC Penney could sell $ 500 million of 100-year unsecured bonds and paid a coupon rate of 7.625%. These things have collapsed and are now trading at 22.5 cents a dollar, according to Finra data. This means that investors expect that there is a near zero chance that the company has ever done so by 2021. The dividend is 33% at today's price and if you buy at this price and if the company manages to make interest payments for one more year , these bonds would be a good deal. If not, well …

    Then, the company has five-year notes of $ 400 million, issued in 2014. Of that, only $ 50 million is still outstanding, and they are due on October 1, 2019. Investors are confident that the company will be able to do it so far and pay the note with cash it has on hand. It is currently 99 cents in dollars:

    In 2007, J.C. Penney $ 700 million of 30-year unsecured bonds, with a 6.375% coupon. Of these bonds, $ 388 million is still outstanding. They have collapsed and are now trading at 21 cents on the dollar, giving them a return of 31%. Investors buying today expect to receive only one year of interest payments, and then the company sold $ 400 million of unsecured 10-year interest payments. après moi le déluge:

    year notes with a coupon of 5.65%. Of that, $ 110 million is still outstanding, due in June next year. These bonds have gone through some gyrations late last year and this year, as investors weighed the chances that the company would make it through June 2020. They are currently trading at around 93 cents on the dollar, indicating that investors are quite safe but not surely, these bonds will be redeemed at face value at maturity, but a month ago they were less secure, and bonds traded as low as 80 cents on the dollar:

    Stock investors have been substantially obliterated and the remaining $ 280 million in market value will be raised. Bond investors give the company a very limited lifetime – if all goes well, a couple of years maybe. So it may be 2020 or 2021 in a best scenario, during which time the company will continue to eat up investor money.

    But this was clear in 2013, when I wrote the article, and we are now six years further into it, and it is still moving in the same direction towards the inevitable, and it has become much closer to the inevitable, odorous distance And the investors have lost a lot of money, and yet they still think about feeding the zombie with new money to keep it limping a little longer.

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