Moody's Upgrades J.C. Penney (JCP) to 'B1'; Outlook Lowered to Stable

September 28, 2016 10:30 AM EDT

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Moody's Investors Service upgraded J.C. Penney Company, Inc.'s (NYSE: JCP) Corporate Family Rating to B1 from B3. Moody's also affirmed the company's Speculative Grade Liquidity rating at SGL-1. The rating outlook was changed to stable from positive. Actions on rated debt instruments are detailed below.

The upgrade of J.C. Penney's ratings reflect its continued improvement in operating performance in the face of challenging market conditions for the department store sector. "While we acknowledge the company has had easier comparisons than most of its peers, its continued progress has resulted in significant deleveraging which is evidence of the traction of its initiatives and the recovery of market share" stated Vice President, Christina Boni. Moody's believes the company can continue to increase sales and operating margins through further improvements in merchandising, sourcing and operations. Nonetheless, soft trends in apparel spending, weak mall traffic, and continued market share gains by off-price retailers are formidable headwinds that remain for J.C. Penney and department stores generally.

Upgrades:

..Issuer: Penney (J.C.) Company, Inc.

.... Probability of Default Rating, Upgraded to B1-PD from B3-PD

.... Corporate Family Rating, Upgraded to B1 from B3

..Issuer: Penney (J.C.) Corporation, Inc.

....Senior Secured Term Loan, Upgraded to Ba2(LGD2) from B1(LGD2)

....Senior Secured ABL Revolving Credit Facility, Upgraded to Ba1(LGD2) from Ba3(LGD2)

....Senior Secured Regular Bond/Debenture, Upgraded to Ba2(LGD2) from B1 (LGD2)

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)B3 from (P)Caa2

....Senior Unsecured Regular Bond/Debenture, Upgraded to B3(LGD5) from Caa2(LGD5)

....Senior Unsecured Shelf, Upgraded to (P)B3 from (P)Caa2

Outlook Actions:

..Issuer: Penney (J.C.) Company, Inc.

....Outlook, Changed To Stable From Positive

..Issuer: Penney (J.C.) Corporation, Inc.

....Outlook, Changed To No Outlook From Positive

Affirmations:

..Issuer: Penney (J.C.) Company, Inc.

.... Speculative Grade Liquidity Rating, Affirmed SGL-1

RATINGS RATIONALE

J.C. Penney's B1 Corporate Family Rating reflects the company's high leverage and weak interest coverage. Debt/EBITDA is estimated to be around 4.6 times as of year-end 2016 and EBITDA-Cap Ex/Interest Expense is around 1.5 times. The rating is supported by the company's solid liquidity profile with total liquidity of approximately $2.4 billion ($429 million of cash and $1.9 billion of undrawn revolving credit commitments as of July 30, 2016) and we expect the company will continue to generate positive free cash flow over the next 12 to 18 months. We believe the company still has room to recover market share lost under previous management's failed business strategies and ongoing merchandising and operational efficiencies will also help the company boost margins over time. The ratings also consider 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 J.C.Penney will continue track towards it operating plan and prioritize 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 were sustained below 4.0x times and EBIT margins are sustained at or above mid single digits.

Quantitatively ratings could be downgraded if credit metrics were to weaken such that debt/EBITDA exceeded 5.0x, or if the company's strong liquidity profile were to erode.



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