Yesterday, JCP announced in an 8-K filed with the SEC that it has borrowed $850 million on its newly expanded $1.8 billion bank credit line …even though it doesn’t really need the money right now. It also said it’s looking for other sources of new finance, which I interpret as meaning finding someone to purchase new bonds or stock.
My guess is that as the company needs seasonal working capital finance it will borrow more on the credit line rather than deplete its cash balances, which should now amount to around $1.8 billion. This despite the fact that paying the current 5.25% interest rate on the $850 million will cost the company $44.6 million a year.
Why do this?
We know that the Ackman/Johnson regime inflicted terrible damage on JCP. Part of this is actual–the stuff about lost sales and profits that we can read in the company’s financial statements. Part of it is psychological–we don’t know how deeply JCP is wounded, how long it will take for the company to heal, nor even how much healing is possible.
a psychological plus
By borrowing the money now, JCP is in a sense buying itself an insurance policy on the psychological/confidence front by establishing several things:
— it now has enough cash to be able to weather two more ugly years like 2012, rather than one. This gives it much more breathing room to negotiate any asset disposals, to say nothing of getting customers back into the stores.
–it has lessened the possibility that its banks will withdraw or reduce the credit line if sales continue to deteriorate. After all, they now have their $850 million that’s in JCP’s hands to protect.
–it demonstrates to suppliers that the company has ample cash to pay for merchandise. JCP will likely get better payment terms with the money on the balance sheet than without it, although it’s not clear to me that payables still won’t shrink this year. More important, in my view, is that suppliers won’t restrict either the quantity or selection of merchandise they deliver to JCP for fear they won’t be paid.
–it avoids the negative publicity (see my 2011 post on Eastman Kodak) that would likely have been generated were JCP to wait until it genuinely needed the funds, or until its banks might be getting cold feet.
so far, so good
So far, Wall Street is taking the move in stride. The stock showed no adverse effect from the announcement. And in pre-market trading today, it’s up.