UPDATE: S&P Lifts Outlook on JCPenney (JCP) to Stable; Affirms 'CCC+' Rating
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(Updated - March 3, 2014 4:32 PM EST)
Standard & Poor's Ratings Services revised its outlook on J.C. Penney Co. Inc. (NYSE: JCP) to stable from negative. At the same time, we affirmed all other ratings, including the 'CCC+' corporate credit rating, on the company.
"The outlook revision reflects our view that performance has begun to stabilize and we forecast further modest gains over the next year," said credit analyst David Kuntz. "As a result, we are revising our liquidity assessment to "adequate" from "less than adequate". However, in our view, the capital structure is unsustainable, but the company does not have any meaningful maturities over the next 12 months."
The stable outlook reflects our view that liquidity will be "adequate" over the next year and that sources of cash will exceed uses by at least 1.2x. However, we believe the company's capital structure is unsustainable in the longer term, but it does not have any meaningful maturities over the next 12 months and so we do not see a clear path to default. It incorporates our
opinion that the company will also realize modest, sequential performance gains because of the recent strategy changes, which include merchandise repositioning and the reintroduction of sales and promotions.
Downside scenario
We could consider lowering our rating if the company experienced a reversal of its performance gains because of merchandise missteps or an erosion of consumer spending. At that time, we believe the company could likely default within the next 12 months. In such a scenario, the company is unable to stabilize operations, leading to a cash burn that is meaningfully higher than our forecast of around $750 million. Under this scenario, vendors would tighten turns leading to a substantial decline in cash on hand.
Upside scenario
Although we consider the possibility for an upgrade to be remote because EBITDA would have to be around $1 billion versus our forecast of about $400 million, key positives would include performance recovery much earlier than we currently expect as the company implements its revised strategy. Another important component would be sustained cash flow from operations that covers ongoing working capital needs and capital expenditures. Additionally, we would look for indications that the company has taken steps to reduce its funded debt, which, in our opinion, result in a sustainable capital structure. Any consideration for an upgrade would require sustained leverage below 7.0x and interest coverage above 1.5x.
Standard & Poor's Ratings Services revised its outlook on J.C. Penney Co. Inc. (NYSE: JCP) to stable from negative. At the same time, we affirmed all other ratings, including the 'CCC+' corporate credit rating, on the company.
"The outlook revision reflects our view that performance has begun to stabilize and we forecast further modest gains over the next year," said credit analyst David Kuntz. "As a result, we are revising our liquidity assessment to "adequate" from "less than adequate". However, in our view, the capital structure is unsustainable, but the company does not have any meaningful maturities over the next 12 months."
The stable outlook reflects our view that liquidity will be "adequate" over the next year and that sources of cash will exceed uses by at least 1.2x. However, we believe the company's capital structure is unsustainable in the longer term, but it does not have any meaningful maturities over the next 12 months and so we do not see a clear path to default. It incorporates our
opinion that the company will also realize modest, sequential performance gains because of the recent strategy changes, which include merchandise repositioning and the reintroduction of sales and promotions.
Downside scenario
We could consider lowering our rating if the company experienced a reversal of its performance gains because of merchandise missteps or an erosion of consumer spending. At that time, we believe the company could likely default within the next 12 months. In such a scenario, the company is unable to stabilize operations, leading to a cash burn that is meaningfully higher than our forecast of around $750 million. Under this scenario, vendors would tighten turns leading to a substantial decline in cash on hand.
Upside scenario
Although we consider the possibility for an upgrade to be remote because EBITDA would have to be around $1 billion versus our forecast of about $400 million, key positives would include performance recovery much earlier than we currently expect as the company implements its revised strategy. Another important component would be sustained cash flow from operations that covers ongoing working capital needs and capital expenditures. Additionally, we would look for indications that the company has taken steps to reduce its funded debt, which, in our opinion, result in a sustainable capital structure. Any consideration for an upgrade would require sustained leverage below 7.0x and interest coverage above 1.5x.
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