Spreads Widen on JCP Swaps as Investors Stay Jittery

PLANO, TX-Although J.C. Penney Co. earlier this month announced “solid progress” in its turnaround efforts and last week dismissed rumors about a possible bankruptcy as “completely false,” the investment community isn't so sure. Fitch Ratings on Thursday noted what it called “significant widening” in spreads on the Plano, TX-based retailer's five-year credit default swaps, a sign of continued investor concern.

“JCP CDS spiked more than 300 basis points over the course of the last week and are now trading at record wide levels,” according to the ratings agency. “The sharp rise in cost to protect JCP's five-year senior bonds indicates that investors suspect a higher risk of default.”

Earlier in October, Fitch downgraded the issuer default ratings on J.C. Penney Co. and J.C. Penney Corp to “CCC” from “B-.” The downgrade reflected higher-than-expected cash burn this year, coupled with concern that the projected free cash flow shortfall in 2014 will require additional external funding, even given an injection of more than $3 billion in liquidity so far this year and a $850 million draw on JCP's revolving line of credit.

Beyond this year, JCP will have to generate a minimum of $750 million to $875 million in EBITDA to fund both ongoing capital expenditures and cash interest expenses, Fitch says. That would mean annual sales of around $13.5 billion, or about 15% above projected levels for this year, and gross margins in the 39% to 40% range.

Should the retailer's financial pressures lead to store closings, it might put pressure on retail landlords but not on CMBS, Fitch said separately. “We do not expect the potential closure of the company's stores to impact rated CMBS deals because they represent relatively small amounts of those transactions,” according to Fitch.

At individual shopping centers, though, the impact could be greater, depending partly on the caliber of the other anchor tenants as well as the property's occupancy levels and trading area's demographics. In a JCP location such as Aventura Mall in Miami, where it's one of a number of prominent anchor tenants, Fitch believes that the ownership could “promptly” release the space should the store go dark.

Fitch notes that JCP's real estate portfolio has been appraised at over $4 billion, including both owned and leased properties. According to the retailer's most recent corporate filings, JCP owns 306 stores, operates another 123 on ground leases and leases 675. It also owns nine distribution centers and leases another six.

Shares of JCP stock were trading at $6.73 per share early Friday afternoon, near the 52-week low of $6.24 per share. The 52-week high was $25.61.