Quarterly report pursuant to Section 13 or 15(d)

Reorganizations

v3.20.2
Reorganizations
6 Months Ended
Aug. 01, 2020
Reorganizations [Abstract]  
Voluntary Petition for Reorganization
2. Chapter 11 Cases

Voluntary Petition for Reorganization
On the Petition Date, the Debtors filed voluntary petitions in the Bankruptcy Court seeking relief under the Bankruptcy Code. Pursuant to order of the Bankruptcy Court, the Chapter 11 Cases are being jointly administered under the caption In re: J. C. Penney Company, Inc. et al., Case No. 20-20182 (DRJ) Documents. Documents filed on the docket of and other information related to the Chapter 11 Cases are available free of charge online at https://cases.primeclerk.com/JCPenney.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors' property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors' bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.

The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. Following the Petition Date, the Bankruptcy Court entered certain interim and final orders facilitating the Debtors’ operational transition into Chapter 11. These orders authorized the Debtors to, among other things, access cash collateral, pay employee wages and
benefits, honor customer programs and pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date. These orders are significant because they allow us to operate our businesses in the normal course.

Prior to the commencement of the Chapter 11 Cases, on May 15, 2020, the Debtors entered into a Restructuring Support Agreement (together with all exhibits and schedules thereto, the “RSA”) with members of an ad hoc group of lenders and noteholders (the “Ad Hoc Group”) that held approximately 70 percent of the Debtors’ first lien debt as of such date. On or about June 7, 2020, additional lenders and noteholders (collectively, and together with the Ad Hoc Group, the “Consenting Stakeholders”) executed the RSA. As of such date, the Consenting Stakeholders held approximately 93 percent of the Debtors’ prepetition first lien debt. The RSA contemplates a restructuring process that will establish both a financially sustainable operating company and a real estate investment trust. On September 10, 2020, the Company entered into a non-binding letter-of-intent (“LOI”) with the Ad Hoc Group, Simon Property Group and Brookfield Property Group that is generally consistent with the framework of the restructuring process contemplated in the RSA. Because the LOI is non-binding, and subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the Bankruptcy Court, there is no assurance that the existing LOI will ultimately result in a final, approved sale or plan of reorganization.

Financing During the Chapter 11 Cases
See Note 9 for discussion of the DIP Credit Agreement, which provides up to $450 million in senior secured, super-priority new money financing, subject to the terms, conditions, and priorities set forth in the applicable definitive documentation and orders of the Bankruptcy Court.

Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and debt.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.

The following table presents liabilities subject to compromise as reported in the unaudited interim Consolidated Balance Sheet at August 1, 2020:

(In millions) August 1, 2020
Debt (1)
$ 3,289 
Operating leases 942 
Merchandise accounts payable 503 
Other accounts payable and accrued expenses 167 
Other liabilities 115 
Accrued interest 34 
Total liabilities subject to compromise
$ 5,050 
(1) Please see Note 9 for details of the pre-petition debt reported as liabilities subject to compromise.

Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code the Debtors may assume, assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of other applicable conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such contract and, subject to certain exceptions, relieves the Debtors from performing future obligations under such contract but entitles the counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Alternatively, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease, if any, and provide adequate assurance of future performance. Accordingly, any description of an executory
contract or unexpired lease with the Debtors in this report, including where applicable quantification of the Company’s obligations under such executory or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.


Reorganization Items, Net
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the quarter ended August 1, 2020:
Three Months 
Ended
(In millions) August 1, 2020
Advisor fees $ 64 
Debtor-in-possession financing fees 50 
Write-off of pre-petition unamortized debt issuance costs 33 
Employee retention 21 
Gains on lease termination (66)
Other 6 
Total reorganization items, net (1)
$ 108 
(1) Cash paid for reorganization items, net for the three months ended August 1, 2020, was $79 million, which includes $2 million in prepaid expenses and the $50 million for DIP financing fees.

Store Asset Related Charges/Gains
In conjunction with our restructuring process that began toward the end of the first quarter of 2020 and continued into the second quarter with the bankruptcy proceedings, the Company has identified certain properties to be considered, and designated, for closing. Additionally, the filing of the Chapter 11 Cases and other restructuring considerations have resulted in various impairment analyses, the reassessment and remeasurement of certain reasonably certain lease terms and the reconsideration of the amortization periods for leasehold improvements and related fixed assets. The effects of these actions, both in the first and second quarters of 2020, resulted in multiple adjustments to store-related and other assets, including right-of-use lease assets and lease liabilities for the three-month and six-month periods ended August 1, 2020. These adjustments included impairments of long-lived assets, impairments of operating lease assets, remeasurement of certain operating lease assets and liabilities based on a reassessment of the reasonably certain lease term, and the rejection of certain leases through the Bankruptcy Court. Since these accounting write offs are primarily related to the eventual closure of stores and other properties, the Company has summarized the impact on the unaudited interim Consolidated Statement of Operations in the table below for the three-month and six-month periods ended August 1, 2020, including the caption in which each item is recorded in the unaudited interim Consolidated Statement of Operations.

Three Months Ended Six Months Ended
(In millions) August 1, 2020 August 1, 2020 Statement of Operations Line Item
Impairments of long-lived assets (see note 13) $ 26  $ 75  Restructuring and management transition
Impairments of operating lease assets (see note 13) 2  50  Restructuring and management transition
Write off of closed store assets 1  1  Restructuring and management transition
Accelerated amortization of operating lease assets (see note 11) 11  11  SG&A
Accelerated depreciation of long-lived assets (1)
28  28  Depreciation and amortization
Gain on remeasurement of operating lease assets and operating lease liabilities (see notes 11 and 13) (20) (20) Restructuring and management transition
Gain on store lease terminations from rejection of leases (see note 11) (61) (61) Reorganization items, net
Gain on sale of closing store fixtures (1) (1) Restructuring and management transition
  Total $ (14) $ 83 
(1) Represents the incremental depreciation expense recorded during the respective period due to the reduced estimated useful life of the underlying long-lived assets

The accounting standards applicable to these adjustments to long-lived assets and operating lease assets and liabilities are based on various facts and circumstances over the period from a decision to close a store (as an indicator of impairment) to the cease use date and lease rejection approval from the Bankruptcy Court. These events drive the timing of recognition and the presentation location in the unaudited interim Consolidated Statement of Operations. At the point that an operating lease for a closing store is rejected and the Company ceases use of the property, all the store’s related long-lived assets will be written-off to their residual value and the store’s operating lease assets and liabilities will be written down to zero. However, under the applicable accounting standards, the write down of these assets and liabilities occurs at different points in time as these stores are eventually closed and the related store leases progress toward rejection. As of August 1, the Company has additional net long-lived assets of $50 million and net operating lease liabilities of $79 million, recorded on the unaudited interim Consolidated Balance Sheet, all related to stores that are currently scheduled for closing. These amounts are expected to be recorded as charges/gains to the statement of operations in future periods through the cease use date and Bankruptcy Court approval of the rejection of the lease, which is currently scheduled for October and November 2020.