Moody’s Investors Service downgraded JC Penney Company’s Corporate Family Rating to B2 from B1.
Moody’s also affirmed JC Penney’s senior secured ABL Revolving Credit Facility at Ba2 and its senior secured term loan and senior secured notes were affirmed Ba3. The Corporation’s secured second lien notes were downgraded to B3 and its senior unsecured notes were downgraded to Caa1. The rating outlook is stable. The company’s SGL-1 rating has also been affirmed.
“The downgrade reflects the continued weakness in operating performance coupled with the uncertainty in its strategic plan given the recent departure of its CEO,” stated Vice President, Christina Boni. “Although the company has opportunities for further improvements in merchandising, sourcing and operations, as well as very good liquidity, significant headwinds remain. JC Penney must close the operating performance gap with its department store peers, as well as manage weak mall traffic and continued market share gains by off-price and online retailers.”
Ratings Rationale
JC Penney’s credit profile is supported by the company’s good liquidity profile, with total liquidity of approximately $2.0 billion ($181 million of cash and $1.86 billion of undrawn revolving credit commitments as of May 5, 2018). Moody’s said it also expects the company will generate positive free cash flow of over $150 million over the next 12 months. Debt/EBITDA is estimated to be around 5.8 times as of fiscal year-end 2018. Although the company has recovered a portion of its lost market share, recent challenges suggest that further progress will be at a much slower pace, Moody’s said. Ongoing merchandising and operational efficiencies should support margins over time. The credit is constrained by the structural challenges facing the department store segment, which include market share losses to off-price retailers, weak mall traffic and the cost of investments associated with managing consumer preferences for online shopping.
The stable rating outlook assumes that JC Penney will continue stabilize both sales and operating margins as it prioritizes debt reduction.
Ratings could be upgraded if the company maintains continued growth in operating earnings indicating its business initiatives continue to succeed. Quantitatively ratings could be upgraded if debt/EBITDA approaches 5.0x times and EBIT/Interest above 1.25x.
Quantitatively ratings could be downgraded if credit metrics were to weaken such that debt/EBITDA exceeded 6.0x on a sustained basis, or if the company’s very good liquidity profile were to erode.
