UPDATE: May 15, 2020: On Thursday J.C. Penney made a $17 million interest payment that was due May 7, the company said in a Friday securities filing. The missed payment, on Penney’s senior secured term loan facility, came with a five-day grace period that would have put Penney in default this week.

The company said in the filing that it used the grace period "to evaluate certain strategic alternatives, none of which have been implemented at this time and which continue to be considered." Penney has also missed a $12 million interest payment on a set of senior notes due in April that came with a 30-day grace period. The retailer has reportedly been eyeing this week to file for Chapter 11 bankruptcy protection.

Dive Brief:

• J.C. Penney is in talks with "key lenders" on bankruptcy funding that would require the retailer hit certain financial milestones, according to a CNBC report that cited anonymous sources.
• According to the report, the $450 million loan would provide $255 million at first and then require Penney hit budget targets, though no deal has been finalized yet. J.C. Penney declined to comment on the record.
• The retailer could file for Chapter 11 as early as Friday with a plan to close up to 200 stores, CNBC also reported. Reuters earlier reported a similar number of closures. In recent weeks, Penney has missed two interest payments together worth $29 million.

Dive Insight:

Retail bankruptcy filings are speeding up as store closures from COVID-19 gobble up what for distressed retailers was already precious liquidity. J. Crew, Neiman Marcus and Stage Stores have all filed in recent weeks, citing the COVID-19 crisis.

All three of those names were already in financial distress before the pandemic hit the U.S. and may well have filed at some point. J. Crew and Neiman have both struggled for years under massive debt loads laid on their books by private equity buyouts, while Stage Stores stumbled amid a rapid and shoestring transformation from department store retailer to off-pricer.

J.C. Penney, too, has struggled for years as it lost customers to mall declines as well as years of identity struggles and merchandising misfires. Publicly traded, it owes much of its debt to a turnaround effort under former CEO Ron Johnson that failed in dramatic fashion, rather than a leveraged buyout. The company tried to sharpen its operations and rewrite its story under current CEO Jill Soltau, but Penney faced an uphill battle against its balance sheet even before the COVID-19 crisis. 

Bankruptcy is often a lender-driven process. Secured lenders that provide a debtor-in-possession loan are incentivized to protect their collateral and repayment prospects. While Penney is reportedly looking to reorganize in bankruptcy and emerge with a leaner footprint, the terms of its debtor-in-possession loan could determine its ultimate fate. 

The devil is always in the details. Toys R Us went into bankruptcy in September 2017 with no firm plans of exit but exuberant rhetoric about modernizing in Chapter 11 and sticking around as the country's last national toy store.  

But Toys R Us got beat up by mass merchants during the all-important holiday toy sales season. It missed its DIP budget targets, and lenders pulled the cord, sending the company into liquidation in spring 2018. 

Suppliers to Toys R Us, which lost many millions of dollars in the bankruptcy, alleged in a lawsuit that executives at the retailer hid its DIP milestones from them. In court papers, creditor attorneys said that Toys R Us' board members "gave no consideration-none at all-to assessing the probability that the DIP financing strategy would fail."

Which is all to say that the structure and language around a retailer's bankruptcy loans matters a lot. It can affect the finances of many other stakeholders in the ecosystem. And it can make the difference between whether a retailer survives or disappears.