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Matt Townsend, Bloomberg News, Published April 15 2013

J.C. Penney taps $850M as CEO Ullman seeks cash

NEW YORK – J.C. Penney Co. drew $850 million from its revolving credit facility as new Chief Executive Officer Myron Ullman hunts for cash in the wake of his predecessor’s failed overhaul.

A week after replacing Ron Johnson as CEO, Ullman is trying to improve J.C. Penney’s liquidity following the first year in which retailer’s operations consumed cash in decades. The drawdown on the

$1.85 billion credit line will be used for capital spending and to replenish inventory as the company opens renovated home departments next month, the Plano, Texas-based retailer said Monday in a statement.

J.C. Penney, which Monday said it is working with advisers to raise additional capital, is focused on selling debt, said a person familiar with the matter, who asked not to be identified because the talks are private. While raising cash by selling a stake to a private-equity firm is being considered, it’s not the primary option, the person said.

“Mike Ullman has his work cut out for him in terms of reassuring suppliers, landlords and employees that J.C. Penney is going to be a going concern,” Alex Fuhrman, an analyst for Piper Jaffray Cos. in New York, said in an interview. Assuming it will have access to the rest of the credit facility, “the company has enough liquidity to make it through the end of this year, but next year is really more of the issue.”

Blackstone Group is helping J.C. Penney raise at least $1 billion, people familiar with the matter have said. The company also has tapped Centerview Partners for advice, a person said Monday.

While the drawdown was more than four times larger than expected, “any capital raise that is not egregiously expensive would be viewed positively for near-term liquidity,” Carla Casella and Paul Simenauer, analysts at JPMorgan Chase & Co. in New York, wrote in a note today upgrading J.C. Penney’s debt to neutral.

The chain of 1,100 stores reinstated Ullman as CEO on April 8, about a day after Chairman Thomas Engibous first contacted him about returning to the job he relinquished to Johnson in November 2011.

Ullman already has begun reversing some of Johnson’s strategies. J.C. Penney is halting the practice of reducing discounts and will put coupon advertising in newspapers again, Bill Ackman, the activist investor who is the retailer’s largest shareholder, said last week.

The home department, whose renovations were underway when Ullman returned, make up about 15 percent of the chain’s total selling square footage and aren’t generating any sales now.

The pending lawsuit with Macy’s over Martha Stewart-brand goods also has clouded the departments’ rollout during the next month. If J.C. Penney loses the dispute and isn’t allowed to sell Martha Stewart items, it may have to liquidate as much as

$100 million of inventory, according to Deborah Weinswig, an analyst for Citigroup in New York.

J.C. Penney was expected to ramp up spending this quarter to finish the home sections, Alex Fuhrman, an analyst for Piper Jaffray Cos. in New York, said in an interview. What Fuhrman didn’t expect was that the company would have to borrow this much from its revolver so quickly.

J.C. Penney showed signs of deteriorating liquidity when its operations consumed $10 million in cash in the year ended Feb. 2, the first year they’ve done so since at least 1987, according to data compiled by Bloomberg. The retailer’s operations generated

$820 million in cash the previous year.

The company in February increased the size of the revolver to $1.85 billion from $1.5 billion and got permission to expand it to as much as $2.25 billion.

Chief Financial Officer Kenneth Hannah told analysts on a Feb. 27 conference call to discuss fourth-quarter results that the company had plenty of liquidity and would fund Johnson’s transformation of the more than century-old chain with cash from operations. Two weeks later, he said he wasn’t opposed to tapping the credit line.

“Using that revolver for working capital requirements is what it’s intended to be,” Hannah said in a March 13 presentation. “Trying to use it as a substitute for the fact that you’re not connecting with your customer is something that the company has to avoid.”