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This episode aired on Bloomberg TV on Apr 16, 2013


Q. So we hear that JCP is considering a leaseback deal to help its cash position How would something like that work?

A. JCP would has an awful lot of real estate, and they’re looking at ways to raise cash with it. In a leaseback, short for a sale-leaseback, it would sell its real estate holdings to third parties, realizing a bunch of cash, and as part of the same deal lease them back so there’s no disruption to operations.

Q. And that’s a common thing to do with commercial real estate as a way to raise capital?

A. Very common, though often one reason to do it is so the lease payments become tax deductible.. given JCP’s problems, I don’t think reducing taxable income is high on the priority list. So that may be a reason to look at a different sort of monetization strategy.

Q. And so what are the options? Presumably the company has lots of restrictions on new borrowing, given its existing credit lines.

A. Right. So another common idea in situations like this is to contribute the real estate down into a new subsidiary that itself would issue debt. That might give the lenders to the new sub a fairly clean shot at the real estate collateral in the event of problems. Some estimates are that it could raise maybe a billion and a half of new cash this way.

Q. Now, how does this impact its “revolver”, the credit line they just tapped the other day for $XYZ?

A. Revolvers are usually secured loans, but they’re normally secured by inventory and receivables of the company. Naturally, JCP and other chain department stores are special cases– they have a ton of real estate, too, which most operating businesses don’t. So dropping the RE into a separate sub, or doing a leaseback, is probably their last shot at raising big new dollar amounts on their own, without selling new equity.