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Rating Action:

Moody's downgrades J.C. Penney's CFR to Caa1; outlook remains negative

Global Credit Research - 30 Apr 2013

Approximately $2.9 Billion of Debt Securities Affected

New York, April 30, 2013 -- Moody's Investors Service today downgraded the long term ratings of J.C. Penney Company, Inc. ("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 following ratings are downgraded:

For J.C. Penney Company, Inc.

Corporate Family Rating to Caa1 from B3

Probability of Default Rating to Caa1-PD from B3-PD

For J.C. Penney Corporation, Inc.:

Senior unsecured notes to Caa2 (LGD 5, 78%) from Caa1 (LGD 4, 66%)

Senior unsecured shelf to (P) Caa2 from (P) Caa1

The following rating is unchanged:

Speculative Grade Liquidity rating at SGL-3

RATINGS RATIONALE

JCP's Caa1 Corporate Family Rating reflects the near term significant weakness in JCP's operating performance and credit metrics. It also reflects that JCP is in process of readdressing its operating strategies which will likely result in earnings remaining weak over the next few quarters. The rating is supported by our opinion that JCP's near term liquidity remains adequate, albeit there will be a sizable cash flow burn in 2013 that will be supported by the proposed $1.75 billion term loan and the $1.85 billion revolving credit facility. The rating also acknowledges the lack of near dated debt maturities. JCP's nearest debt maturity is not until 2015 when its $200 million 6.875% medium term notes mature.

The negative rating outlook acknowledges Moody's expectation that JCP's earnings continue to face downward pressure until the company stabilizes the sales and gross margin trends. It also acknowledges the sizable level of free cash flow burn that is anticipated in 2013 and the current weakness in credit metrics.

Ratings could be downgraded should JCP's liquidity erode, should its sales and earnings not begin to evidence signs of stability by the fourth quarter of 2013, or should the overall probability of default increase.

Given the negative outlook, an upgrade is unlikely at the present time. In time, the outlook could return to stable should the company evidence stability in sales while showing an improvement in earnings and maintaining adequate liquidity. Ratings could be upgraded should earnings improve such that it become likely that debt to EBITDA will remain below 7.25 times and EBITA to interest expense approaches 1.0 time.

The principal methodology used in this rating 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 one of the U.S.'s largest department store operators with about 1,100 locations in the United States and Puerto Rico. It also operates a website, www.jcp.com. Revenues are about $13 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Margaret M 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 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 Caa1; outlook remains negative
No Related Data.

 

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