JCPenney… or JCPenniless?: Retailer files for bankruptcy

May 31, 2020

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2 min read

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What's going on here?

JCPenney (“JCP”), a cornerstone retailer in US shopping malls, has joined a myriad of American brick-and-mortar chains to file for bankruptcy, following years of debt overload which had been worsened by the coronavirus pandemic.

What does this mean?

District of Texas. Chapter 11 is a form of bankruptcy in the US that helps companies reorganise and restructure their debts and assets, giving them a fresh start. In comparison, bankrupt companies in the UK enter what is called administration, whereby a creditor puts together a restructuring plan for the business’ functioning, reducing much of the management’s  control over the company. 

JCP is another retail casualty of the COVID-19 pandemic, which has mercilessly hit the US. Companies such as J Crew, Neiman Marcus and John Varvatos have filed for bankruptcy already, but JCP tops them all with its 846 stores and 85,000 employees across 50 American states

The department store’s somewhat-expected filing follows 20 years of decline resulting from a nose-dive in sales, increased digital competition and a disastrous attempt to change the leadership in 2013. JCP has been delisted from the New York Stock Exchange due to a continued value below $1 per share for most of 2020, meaning its stock shares can no longer be traded and it cannot issue new ones. However Jill Soltau, JCP’s chief executive, remains confident that the brick-and-mortar giant will emerge from “Chapter 11 and this pandemic as a stronger retailer”.

What's the big picture effect?

JCP, once a traditionally respectable shopping destination has a debt load of $4bn, with over $1bn in secured senior notes – a type of bond which must be repaid before other debts if the issuer declares bankruptcy and is forced into liquidation. JCP also owes $32m to Nike and $7m to Adidas. 

Consequently, the company is looking to conclude a deal with its lenders to reduce some of its debt. As it re-emerges from bankruptcy, JCP plans to split into two public companies to increase liquidity and get cash flowing into the company. Despite this, it has announced that many stores will close permanently as part of its restructuring, even after social distancing is eased, and many employees will be furloughed. 

Legally, this raises questions of employment rights and the protection of employee financial stability. Furthermore, JCP’s financial restructuring and asset management will need to be sufficiently savvy and well-advised to face the increased reliance on internet shopping (the only retail category to grow last month) and new consumer demand. For instance, spending on furniture and clothing dipped 59% and 79% respectively last month in the US – products on which JPC’s revenues heavily rely. 

It will be worth keeping an eye out for disputes between supply corporations and insolvent companies who fail to honour their debts. The contentious sectors of law firms (international arbitration, commercial litigation, and the like) are set to be on fire as COVID-19  continues to knock down already-disheveled retailers.

Report written by Anaïs Itani

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