Retailing giant J.C. Penney Company divulged Monday that it had tapped a portion of its $1.85 billion line of credit, a sign that the company is running short on working capital and a major financial restructuring could be near.

The $850 million will be used to fund working capital requirements and capital expenditures, J.C. Penney said in an SEC filing, “including the replenishment of inventory levels in anticipation of the completion of [the company’s] newly renovated home department next month.”

The home department makeover in more than 500 stores requires “a significant inventory build,” said J.C. Penney CFO Ken Hannah in a statement. “The draw under our revolver provides more than our current funding needs to ensure our continued liquidity.”

Despite J.C. Penney’s widespread management and performance issues, the size and timing of the draw-down surprised some analysts. “This is more cash than we thought J.C. Penney might need to get through the year and also a bit sooner than we thought it might need it,” said Gimme Credit  analyst Carol Levenson in a research note. (Levenson has a “sell” rating on J.C. Penney bonds.) “Often such a move is viewed as desperate by the financial markets, and to a certain extent it is.”

While Levenson said it is a good sign that neither the banks nor bondholder covenants prevented the company from borrowing $850 million on the committed credit line, the move “also demonstrates that the ‘internally financed transformation’ envisioned by previous management was a pipe dream.”

Penney’s board ousted CEO Ron Johnson last week after 16 months, as his attempt at a turnaround failed to check declines in sales and store traffic. The company experienced a $1.3 billion loss in the 12 months ending February 2, and its shares have fallen 66% from their 2012 high.

Hannah, the finance chief,, said J.C. Penney would seek to raise additional capital. According to reports last week, J.C. Penney hired the financial advisory firm of Blackstone Group to explore its options.

J.C. Penney is considering hundreds of millions in non-core asset sales, according to Hannah. In addition, investor Bill Ackman of Pershing Square Capital Management has said that equity investors are still willing to put up more money to back Penney’s turnaround. (Pershing Square owns an 18% stake in Penney.)

But Vornado Realty, which owned a 41% stake in J.C. Penney, announced last week that it had sold 10 million shares of the company at a $224 million loss. Levenson said the subsequent revolver draw-down shows that “no potential equity investor was ready with a checkbook.”

Leave a Reply

Your email address will not be published. Required fields are marked *