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J.C. Penney Company, Inc. (JCP), Goldman Sachs Group, Inc. (GS): When $1.75 Billion Isn’t Enough

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Earlier this week, I debated whether J.C. Penney Company, Inc. (NYSE:JCP) stock was a falling knife or a screaming value.

On one hand, the company just wrapped up a dismal first quarter during which it lost a whopping $348 million. First-quarter sales dropped 16.4% to $2.635 billion, hurt by comparable-store sales, which fell a terrible 16.6%. The company’s gross margin continued to fall, and operating cash flow also worsened further from the year-ago period.

J.C. Penney Company, Inc. (NYSE:JCP)

On the other hand, believe it or not, those results actually marked a sequential improvement over J.C. Penney Company, Inc. (NYSE:JCP)’s even more horrendous performance in the fourth quarter of 2012, which directly led to the firing of then-CEO Ron Johnson. As a result, shares of J.C. Penney Company, Inc. (NYSE:JCP) are actually up nearly 23% over the past month, and investors are holding on to hope that the company might actually be able to eventually return to sustained profitability.

That’s where the company’s previously announced $1.75 billion five-year loan facility with Goldman Sachs Group, Inc. (NYSE:GS) came in. After all, nobody expects the company’s losses to end overnight, and with only $821 million in cash remaining with more than $3.8 billion in debt, J.C. Penney Company, Inc. (NYSE:JCP) certainly wouldn’t have been able to stay solvent much longer.

More, please
Then, just the other day, J.C. Penney Company, Inc. (NYSE:JCP) announced that it had actually secured the loan for $2.25 billion, or $500 million more than the struggling retailer initially sought.

CFO Ken Hannah elaborated by saying, “This new funding gives us the financial flexibility to pursue our plans to put the company back on a path to profitable growth.”

So what does this mean for investors?

As fellow Fool Adam Levine-Weinberg pointed out last week, the initial loan would have already come at a high cost, especially considering J.C. Penney Company, Inc. (NYSE:JCP) would need to spend around $370 million of the new funds to buy out existing debt holders as a prerequisite for issuing new secured debt.

On a slightly more encouraging note, when we remember that the old $1.75 billion loan would have provided just enough cash to replace the company’s current $850 million line of credit while offsetting its operating losses for the rest of 2013, the extra $500 million should give J.C. Penney a bit more wiggle room if it continues losing money after that point.

Putting aside the fact that those continued losses would be bad for shareholders (to put it kindly), Adam also noted that the minimum 6.75% rate on the $1.75 billion loan would have cost J.C. Penney at least $500 million in interest over the next five years.

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