Moody's Downgrades J.C. Penney (JCP) CFR to Caa1 from B3
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Moody's Investors Service today downgraded the long term ratings of J.C. Penney Company, Inc. (NYSE: JCP) including its Corporate Family Rating to Caa1 from B3. The Speculative Grade Liquidity rating of SGL-3 remains unchanged. The rating outlook also remains negative.
The downgrade follows JCP's announcement that it had entered into a commitment letter with Goldman Sachs under which Goldman Sachs has committed to provide a $1.75 billion senior secured term loan. The term loan will be secured by a first lien of real estate and a second lien on inventory and accounts receivable. The proceeds of the term loan will be used to fund ongoing working capital requirements, other general corporate purposes, and to amend, acquire, or satisfy and discharge the outstanding debentures due 2023.
The term loan will bolster JCP's liquidity by increasing its cash balances and reducing its reliance on its revolving credit facility. Although the term loan bolsters JCP's liquidity, it will not solve JCP's longer term performance concerns nor reduce the level of anticipated cash burn at JCP over the next twelve months. The downgrade acknowledges that the term loan will greatly weaken JCP's capital structure at a time when its earnings are at precarious levels. The downgrade reflects Moody's opinion that the position of the existing bondholders has been weakened by the addition of further secured debt ahead of the unsecured notes in the capital structure. It also acknowledges that the additional debt makes it highly unlikely that JCP will be able to bring debt to EBITDA to below 7.0 times and EBITA to interest expense above 1.0 time over the next twelve months, levels more indicative of a low single B rating.
The downgrade follows JCP's announcement that it had entered into a commitment letter with Goldman Sachs under which Goldman Sachs has committed to provide a $1.75 billion senior secured term loan. The term loan will be secured by a first lien of real estate and a second lien on inventory and accounts receivable. The proceeds of the term loan will be used to fund ongoing working capital requirements, other general corporate purposes, and to amend, acquire, or satisfy and discharge the outstanding debentures due 2023.
The term loan will bolster JCP's liquidity by increasing its cash balances and reducing its reliance on its revolving credit facility. Although the term loan bolsters JCP's liquidity, it will not solve JCP's longer term performance concerns nor reduce the level of anticipated cash burn at JCP over the next twelve months. The downgrade acknowledges that the term loan will greatly weaken JCP's capital structure at a time when its earnings are at precarious levels. The downgrade reflects Moody's opinion that the position of the existing bondholders has been weakened by the addition of further secured debt ahead of the unsecured notes in the capital structure. It also acknowledges that the additional debt makes it highly unlikely that JCP will be able to bring debt to EBITDA to below 7.0 times and EBITA to interest expense above 1.0 time over the next twelve months, levels more indicative of a low single B rating.
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