Moody’s Investors Service downgraded J.C. Penney’s Corporate Family Rating to Caa3 from Caa1 and its Probability of Default rating to Caa3-PD from Caa1-PD. Moody’s also downgraded Penney’s senior secured ABL Revolving Credit Facility to Caa1 from B2, its senior secured term loan and senior secured notes to Caa2 from B3, and its secured second lien notes to Ca from Caa2. Its senior unsecured notes were downgraded to C from Caa3. The rating outlook for J.C. Penney has been revised to negative from stable. The company’s SGL-2 rating was downgraded to SGL-3.

“Although J.C Penney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure J.C. Penney’s EBITDA, impede its turnaround strategy and weaken its leverage to unsustainably high levels” Moody’s Vice President Christina Boni stated.

Downgrades

  • Probability of default rating downgraded to Caa3-PD from Caa1-PD
  • Speculative grade liquidity rating downgraded to SGL-3 from SGL-2
  • Corporate family rating downgraded to Caa3 from Caa1
  • Senior secured term loan downgraded to Caa2 (LGD3) from B3 (LGD3)
  • Senior secured ABL revolving credit facility downgraded to Caa1 (LGD2) from B2 (LGD3)
  • Senior secured 2nd lien regular bond/debenture downgraded to Ca (LGD5) from Caa2 (LGD5)
  • Senior secured regular bond/debenture downgraded to Caa2 (LGD3) from B3 (LGD3)
  • Senior unsecured medium-term note program downgraded to (P)C from (P)Caa3
  • Senior unsecured regular bond/debenture downgraded to C (LGD6) from Caa3 (LGD5)
  • Senior unsecured shelf downgraded to (P)C from (P)Caa3

Outlook Actions

  • Changed To Negative From Stable

Ratings Rationale
Moody’s said, “The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The department store sector has been one of the sectors most significantly affected by the shock, given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in J.C. Penney’s credit profile, including its exposure to potential unit closures, have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and J.C. Penney remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects the impact on J.C. Penney of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

“J.C. Penney’s Caa3 corporate family rating is supported by the company’s adequate liquidity provided by its sizable cash balances. In March 2020, J. C. Penney drew approximately $1.25 billion on its $2.35 billion revolving credit facility to increase its cash position above its $386 million of cash on hand as of February 1, 2020. Moody’s expects the company will have significant cash flow deficits in fiscal 2020 as EBITDA declines from the effect of COVID-19 on store traffic and continuing weak consumer demand hurt results. Moody’s estimates that EBITDA could decline in excess of 80% in fiscal 2020 before slowly recovering in 2021. Moody’s expects it will take well into 2022 before EBITDA reverts back to the approximately $600 million of EBITDA realized in 2019. As a result, J.C. Penney’s leverage will remain at unsustainably high levels over the next two years. In addition, the company’s work to define and execute its strategy to return to stabilizing its market position and improving profitability will be difficult in the current operating environment. The credit is also constrained by the structural challenges facing the department store segment, which include market share losses to off-price retailers, and the continued increase in online sales penetration.”

The ratings agency said the negative rating outlook reflects the challenges posed by COVID-19 to improve its sales and operating margins, given its elevated leverage and the increased risk of a debt restructuring.

Ratings could be upgraded if the company maintains a good liquidity profile and has consistent growth in sales and operating earnings indicating its business initiatives are succeeding, and upcoming maturities are repaid fully or refinanced. Ratings could be downgraded if credit metrics were to weaken such that the company’s adequate liquidity profile was to erode or a debt restructuring was enacted.

Photo courtesy J.C. Penney