The novel coronavirus has spread throughout the globe, unchecked, creating havoc, sickness, death, and economic devastation. The world is in an uncomfortable position without a vaccine or cure that has forced communities into quarantine. In many countries across the globe, non-essential businesses were ordered to shut, putting pressure on retailers that drive revenues from store traffic. Many of the large retailers were under pressure ahead of the quarantine, and it now appears that one of the US’s largest is in advanced bankruptcy talks.
J.C Penny is Preparing to Default
The Wall Street Journal is reporting that retail giant J.C Penny is in advanced talks to file for bankruptcy protection. The retailer missed an interest payment due to bondholders on April 15. The talks are with a group of lenders that would provide the company the funding it needs to avoid having to file for protection.
The retailer is just above to head into an economic collapse caused by the quarantine. The journal reports that Penney is in discussions with existing lenders including Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. J.C. Penny is looking for a debtor-in-possession loan that would allow the company to keep the department-store chain’s operations funded during a court-supervised bankruptcy.
Reports show that the loan package to J.C. Penny is approximately 1-billion US dollars. The loan will likely be split as a syndicated deal to other lenders that are interested in getting the first position in the bankruptcy proceedings. The loan from the banks will be critical. The company entered into a 30-day grace period after missing an interest payment due to bondholders on April 15.
Why are Department Stores Struggling
The struggles of J.C. Penny are indicative of the entire Department Store business. Department stores were struggling financially ahead of the spread of the virus. Most have had problems given their huge debt loads and competition from Amazon and Walmart. Some of the major competitors such as Macy’s Inc. plans to close 125 locations over the next three years. Kohl’s Corp. ’s sales the most on record within the last 12-months. Neiman Marcus Group Inc. is planning to file for bankruptcy at any time to protect against a potential default.
Retailers are not alone when it comes to suffering financially due to the virus and the subsequent quarantine. Hospitality businesses such as airlines, cruises, and hotel chains have been hammered. Energy companies have seen oil prices tumble from above $60 per barrel ahead of the spread of the pandemic to less than zero for the first time in history. A total of seven U.S. oil-and-gas drillers filed for bankruptcy in the first quarter of 2020.
What is Fallout?
The aftermath of default from J.C. Penny or Neiman Marcus can be devastating to the owners of malls across the country. Mall operators have been in a state of limbo after several of their clients were unable to make rent payments for April. With May looming, the first of the month will be a key period for many investors across the globe. The business model for most real estate investors is to mortgage property and receive rent payments which offset your costs and generate revenue. While many landowners have worked out deals with their banks to put off loan payments, the circular pain will cause further financial damage. The upshot is that bankruptcies will be part of the recovery process and the demise of several retailers should not be a surprise.
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