Moody's Investors Service today downgraded the
long term ratings of J.C. Penney Company, Inc. JCP including its
Corporate Family Rating to Caa1 from B3. The Speculative Grade Liquidity
rating of SGL-3 remains unchanged. The rating outlook also remains
negative.
The downgrade follows JCP's announcement that it had entered into a
commitment letter with Goldman Sachs under which Goldman Sachs has
committed to provide a $1.75 billion senior secured term loan. The term
loan will be secured by a first lien of real estate and a second lien on
inventory and accounts receivable. The proceeds of the term loan will be
used to fund ongoing working capital requirements, other general
corporate purposes, and to amend, acquire, or satisfy and discharge the
outstanding debentures due 2023.
The term loan will bolster JCP's liquidity by increasing its cash
balances and reducing its reliance on its revolving credit facility.
Although the term loan bolsters JCP's liquidity, it will not solve JCP's
longer term performance concerns nor reduce the level of anticipated cash
burn at JCP over the next twelve months. The downgrade acknowledges that
the term loan will greatly weaken JCP's capital structure at a time when
its earnings are at precarious levels. The downgrade reflects Moody's
opinion that the position of the existing bondholders has been weakened
by the addition of further secured debt ahead of the unsecured notes in
the capital structure. It also acknowledges that the additional debt
makes it highly unlikely that JCP will be able to bring debt to EBITDA to
below 7.0 times and EBITA to interest expense above 1.0 time over the
next twelve months, levels more indicative of a low single B rating.
The following ratings are downgraded:
For J.C. Penney Company, Inc.
Corporate Family Rating to Caa1 from B3
Probability of Default Rating to Caa1-PD from B3-PD
For J.C. Penney Corporation, Inc.:
Senior unsecured notes to Caa2 (LGD 5, 78%) from Caa1 (LGD 4, 66%)
Senior unsecured shelf to (P) Caa2 from (P) Caa1
The following rating is unchanged:
Speculative Grade Liquidity rating at SGL-3
RATINGS RATIONALE
JCP's Caa1 Corporate Family Rating reflects the near term significant
weakness in JCP's operating performance and credit metrics. It also
reflects that JCP is in process of readdressing its operating strategies
which will likely result in earnings remaining weak over the next few
quarters. The rating is supported by our opinion that JCP's near term
liquidity remains adequate, albeit there will be a sizable cash flow burn
in 2013 that will be supported by the proposed $1.75 billion term loan
and the $1.85 billion revolving credit facility. The rating also
acknowledges the lack of near dated debt maturities. JCP's nearest debt
maturity is not until 2015 when its $200 million 6.875% medium term notes
mature.
The negative rating outlook acknowledges Moody's expectation that JCP's
earnings continue to face downward pressure until the company stabilizes
the sales and gross margin trends. It also acknowledges the sizable level
of free cash flow burn that is anticipated in 2013 and the current
weakness in credit metrics.
Ratings could be downgraded should JCP's liquidity erode, should its
sales and earnings not begin to evidence signs of stability by the fourth
quarter of 2013, or should the overall probability of default increase.
Given the negative outlook, an upgrade is unlikely at the present time.
In time, the outlook could return to stable should the company evidence
stability in sales while showing an improvement in earnings and
maintaining adequate liquidity. Ratings could be upgraded should earnings
improve such that it become likely that debt to EBITDA will remain below
7.25 times and EBITA to interest expense approaches 1.0 time.
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