• On 21 May 2013, Moody’s announced rating actions on MBIA Insurance Corp., National Public Finance Guarantee Corp., MBIA Inc. and other related entities. Because of the large number of credits across several asset classes affected by these rating actions, including Moody's-rated securities that are guaranteed or "wrapped" by these companies, ratings appearing on this website may not yet reflect current information. For current information on affected credits, please visit www.moodys.com/fig.
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Rating Action:

Moody's downgrades J.C. Penney's CFR to B3

Global Credit Research - 20 Nov 2012

Approximately $2.9 Billion of Debt Securities Affected

New York, November 20, 2012 -- Moody's Investors Service today downgraded J.C. Penney Company, Inc.'s ("JCP") long term ratings, including its Corporate Family Rating and Probability of Default Rating to B3. At the same time, Moody's also downgraded J.C. Penney's Speculative Grade Liquidity rating to SGL-3 which represents adequate liquidity. The rating outlook is negative.

The following ratings are downgraded

For J.C. Penney Company, Inc.

Corporate Family Rating to B3 from Ba3

Probability of Default Rating to B3 from Ba3

Speculative Grade Liquidity rating to SGL-3 from SGL-1

For J.C. Penney Corporation, Inc.

Senior unsecured notes to Caa1 (LGD 4, 66%) from Ba3 (LGD 4, 59%)

Senior unsecured shelf to (P) Caa1 from (P) Ba3

RATINGS RATIONALE

The downgrade of the Corporate Family Rating and Probability of Default rating reflects Moody's expectation that JCP's fourth quarter gross margins will severely decline as a result of the need to actively clear excess inventory. This, when combined with continued sizable sale declines in the fourth quarter, will lead to earnings and credit metrics bottoming out at levels significantly weaker than expected. Thus, Moody's no longer believes that credit metrics will return to being supportive of a Ba3 rating over the next twelve months. Moody's currently estimates that JCP's credit metrics will fall to levels indicative of a Ca rating for fiscal year 2012.

The downgrade of the Speculative Grade Liquidity to SGL-3 from SGL-1 reflects Moody's estimate of increased cash burn over prior estimates and our belief that JCP will need to draw down its cash balances in 2013 to finance the capital required for the new shops. This will require JCP to temporarily use its revolving credit facility over the next twelve months to fund capital expenditures and interim working capital needs.

JCP recently announced third quarter results which were significantly worse than Moody's expectations of a -20% decline. JCP's third quarter sales results indicated an acceleration in the pace of decline to a -26.1% comparable store sales decline compared to -21.7% in the second quarter. In addition, EBIT also declined significantly in the second quarter to $(268) million compared to $120 million last year.

The B3 rating reflects JCP's very poor credit metrics, significant level of operating losses, and projected level of free cash flow burn. It also reflects that sales will contract further resulting in additional erosion in earnings and credit metrics by the end of 2012. The rating is supported by JCP's adequate liquidity from its $525 million in cash at October 27, 2012 and a $1.5 billion undrawn asset based revolving credit facility expiring July 2016. It also reflects that JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature. JCP's adequate liquidity and lack of near dated debt maturities provide it with the flexibility to develop a strategy to abate the sizable declines in both sales and gross margins while rolling out its new shops concept. Moody's also believes that JCP's unencumbered assets provide it with additional financial flexibility.

Moody's continues to believe that the new shops are compelling and the sales per square foot generated during the third quarter provide a hopeful data point. However, the new shops only comprise about 11% of JCP selling space and it will take JCP another year to bring the new shops up to 40% of its selling space. In addition, it is currently unclear how JCP will bring back customer traffic and drive sales in the "heritage" JCP square footage.

The B3 rating balances the near term significant weakness in JCP's profitability and credit metrics against a longer term view that ultimately its shops concept and revitalized merchandise will drive higher gross margins increasing profitability such that credit metrics will improve back to levels supportive of a B3 level. Moody's notes that JCP debt to EBITDA at October 27, 2012 was 8.0 times and EBITA to interest expense was 0.0 times, both levels are more indicative of a Ca rating. Moody's anticipates that credit metrics will erode further from these levels but that the erosion will be temporary.

The negative outlook indicates Moody's concern that JCP earnings and free cash flow may decline further than currently anticipated. The negative outlook also reflects the risk that JCP could increase its reliance on its revolving credit facilities.

Ratings could be downgraded should the rate of JCP's sales decline accelerate above the third quarter rate in the fourth quarter of 2012. Ratings could also be downgraded should the sales decline not abate once JCP anniversaries the launch of its new pricing strategy in the first quarter of 2013 or should gross margins not begin to recover in the first quarter of 2013. Quantitatively ratings could be downgraded should it become likely that debt to EBITDA will remain sustained above 8.0 times over the longer term.

Given the negative outlook, it is unlikely that ratings will be upgraded over the near term. However, ratings could be upgraded should operating performance improve such that sales begin to grow while achieving a 36% gross margin and debt to EBITDA is likely to remain sustained below 7.0 times. The rating outlook could return to stable should JCP's sales and gross margins stabilize.

The principal methodology used in rating J.C. Penney Company, Inc was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

J.C. Penney Company, Inc. is a department store operator with about 1,100 locations in the United States and Puerto Rico. It also operates a website, www.jcp.com. Revenues are about $14 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Margaret Taylor
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades J.C. Penney's CFR to B3
No Related Data.

 

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