Rating Action: Moody's changes J.C. Penney's rating outlook to stable
Global Credit Research - 29 Sep 2014
Approximately $7.2 billion of rated debt securities affected
New York, September 29, 2014 -- Moody's Investors Service today affirmed J.C. Penney Company, Inc.'s Caa1 Corporate Family Rating ("CFR"), Caa1 - PD Probability of Default Rating, and senior unsecured notes. At the same time, Moody's changed J.C. Penney's rating outlook to stable from negative. The change in outlook was prompted by the successful closing of $400 million senior unsecured notes which will be used to fund the partial tender offer for J.C. Penney's $200 million 6.875% notes due October 2015, $200 million 7.675% notes due August 2016, and $285 million 7.95% notes due April 2017. At the same time, Moody's changed the Speculative Grade Liquidity rating to SGL-2 from SGL-3 due to improved operating performance and extension of the debt maturity schedule.
The following ratings are changed:
Speculative Grade Liquidity rating to SGL-2 from SGL-3
The following ratings are affirmed:
For J.C. Penney Company, Inc.
Corporate Family Rating at Caa1
Probability of Default Rating at Caa1-PD
For J.C. Penney Corporation, Inc.
$1.85 billion asset based revolving credit facility due June 2019 at B1 - LGD 2
$500 million asset based "first in last out" term loan due June 2019 at B2 - LGD 2
$2.2 billion term loan due 2018 at B2 - LGD 2
Senior unsecured notes at Caa2 -LGD 5
Senior unsecured shelf at (P) Caa2
RATINGS RATIONALE
The change in outlook reflects the successful completion of $400 million senior unsecured notes which will be used to fund the partial tender offer for J.C. Penney's $200 million 6.875% notes due October 2015, $200 million 7.675% notes due August 2016, and $285 million 7.95% notes due April 2017. Given the partial tender offer for the $200 million notes due 2015, Moody's expects J.C. Penney to carry additional excess cash to address the remaining $60 million unsecured notes due 2015. Moody's views this financing as a credit positive event as it will push out J.C. Penney's 2015 maturities and a portion of their 2016 and 2017 debt maturities. Given the successful refinancing Moody's has also upgraded J.C. Penney's Speculative Grade Liquidity rating to SGL-2 acknowledging the elimination of a near dated debt maturity.
Although J.C. Penney sales and gross margins have notably improved in 2014, its profitability and credit metrics remain very weak. Further improvement in earnings is required for J.C. Penney to have a sustainable capital structure. J.C. Penney's Caa1 Corporate Family Rating reflects our belief that J. C. Penney will continue to generate operating losses over the next twelve to eighteen months but that the level of operating losses will abate further. The rating also incorporates the significant weakness in J.C. Penney's credit metrics. The rating is supported by J.C. Penney's good liquidity which provides it with time to grow both sales, gross margins, and free cash flow. Given J.C. Penney's reduced level of capital expenditures, better inventory management, and strengthened performance, we estimate that J.C. Penney will likely burn less than $50 million of free cash flow under Moody's base case scenario. Under a downside scenario there is the potential for it to burn close to $250 million in free cash flow. We believe J.C. Penney's $847 million in available cash at August 2, 2014 and its $1.85 billion asset based credit facility provide it with good liquidity which supports the potential range of free cash flow burn.
The stable rating outlook acknowledges J.C. Penney's good liquidity and lack of near dated debt maturities which provides the company with the time to address its operating losses.
Given the significant weakness is credit metrics, an upgrade is unlikely at the present time. Over time, ratings could be upgraded should earnings improve such that it becomes likely that debt to EBITDA will remain below 7.25 times and EBITA to interest expense approaches 1.0 time.
Ratings could be downgraded should J.C. Penney's liquidity erode, should its sales and earnings not continue to evidence signs improvement, or should the overall probability of default increase.
The principal methodology used in this rating was Global Retail Industry published in June, 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on
www.moodys.com for a copy of these methodologies.
J.C. Penney Company, Inc. is a U.S. department store operator with about 1,100 locations in the United States and Puerto Rico. It also operates a website,
JCPenney - Furniture, Women's Clothing, Men's Clothing, Boy's & Girl's Clothing. - JCPenney. Revenues are over $12 billion.