The stock price of J C Penney Company Inc (NYSE:JCP) surged after the company announced its cash tender offers for up to $300 aggregate principal on a priority basis. The shares of the company were trading at $11.15 per share, up by 3.53% at the time of this writing, around 12:29 P.M. in New York.
J C Penney cash tender offers
J C Penney Company Inc (NYSE:JCP) is offering its 6.875% Medium-Term Notes due 2015 that has $200 million outstanding with acceptance priority and 7.65% Senior Unsecured Notes due 2016 that has $199.955 million outstanding with acceptance priority number two. The company is also offering its 7.95% Senior Unsecured Notes due 2017 that has $285.35 million outstanding with acceptance priority number three and $100 million repurchase cap.
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J C Penney Company Inc (NYSE:JCP) will fund the tender offers with the proceeds of new senior notes due 2019. The company and its wholly-owned subsidiary, J C Penney Corporation are co-obligators of the new unsecured notes.
Steven Ruggiero, managing director and head of research at R.W. Pressprich & Co., said the new notes will be issued as a new series of debt securities under a new indenture. The new notes will be ranked equal in right of payment with all of the existing and unsecured and unsubordinated indebtedness including the existing senior unsecured notes of J C Penney Company Inc (NYSE:JCP).
“Optional redemption of the new notes is at a redemption price equal to the greater of (1) 100% of the principal amount of the notes to be redeemed and (2) a T+50bp make whole. There is a 101 change of control put. The limitation on liens test limits debt secured by liens to not more than 5% of Stockholder’s Equity and there is a limitation on sale and lease-back transactions,” according to Ruggiero in a research note.
Ruggiero noted that the management of J C Penney Company Inc (NYSE:JCP) indicated its intention to increase the size of the new issue. He believed that an increase would be likely, and a $500 million to $550 million deal is not surprising.
According to him, it would give flexibility to the company to tender all of its $200 million 6.875% Senior Unsecured Notes due 2015, $200 million Senior Unsecured Notes due 2016 and $100 million of its $285 million 7.95% Senior Unsecured Notes 2017 with $50 million remaining for general corporate purposes.
Notes pricing, EPS accretion
According to Ruggiero, J C Penney Company Inc (NYSE:JCP) is initially considering to price the notes in the low to mid 8% range. He believed that the notes would be priced in the mid to low 7%, which would offer relative value for high-yield investors. He even expected a lower pricing if the company would increase the size of the deal to $500 million or $550 million.
Ruggiero believed that the tender offer and refinancing has little EPS accretion. According to him, “We would expect limited if any reductions in JCP’s interest expense given our expectations for pricing. The company benefits, however, from reduced near-term debt maturities as they would be pushed out beyond 2017 should the tender offer be completed.”
He maintained his Buy rating for the unsecured notes and Market Perform for the shares of J C Penney Company Inc (NYSE:JCP).