J.C. Penney Company, Inc. Survival Rate Strengthens In Credit-Default Swaps

Updated on

J.C. Penney Company, Inc. (NYSE:JCP), the struggling century-old department store chain, continues to show signs that it will be able to recover from the $2.5 billion losses it incurred over the past three years.

Since the return of Mike Ullman as CEO, the retailer’s prospects continue to improve. Ullman managed to convince the traditional customers of J.C. Penney Company, Inc. (NYSE:JCP) to come back and shopping at their stores as he resumed coupons and sales events. Lenders also provided the retailer with $2.35 billion in credit to enable him to implement strategies and change the mistakes made by former CEO Ron Johnson, who was ousted by the company.

J.C. Penney’s sales increase

J.C. Penney Company, Inc. (NYSE:JCP) reported that sales increased for the first time in three years during the first quarter this year. The retailer posted a 6.2% increase in same store sales and indicated sequential improvement every month within the quarter. The company’s net sales were $2.8 billion during the quarter.

“It is clear that our efforts to re-merchandise many areas of the store and revamp our messaging to the customer are taking hold,” according to Ullman in its previous statement.

Commenting on the improvements shown by J.C. Penney Company, Inc. (NYSE:JCP), James Goldstein, an analyst at CreditSights Inc., said, “Essentially they’ve gone back to the old style of business, and it’s probably the best solution in the interim.”  The company recently announced commitment from banks for an asset-based revolver and a term-loan.

According to Goldstein, the new credit line provides flexibility. He added, “They could’ve gone on without it, but it’s comforting to vendors and to near-term bondholders as well.”  He has an Outperform rating on shares of J.C. Penney Company, Inc. (NYSE:JCP).

Inverted curve to protect debt with swaps

Based on data compiled by CMA in privately negotiated markets, the cost to protect against default within two years declined the most in a year—below the price of five-year protection in a year.  CMA is owned by McGraw Hill Financial Inc (NYSE:MHFI)

The cost of protecting against default for two years dropped to 634 basis points yesterday, compared with 874 basis points for five-year protection, according to CMA.

Bloomberg explained that the cost of protecting debt with swaps normally increases with the length of the contract’s term because investors pay more for unexpected risks. The inverted curve in which short-term protection costs more than longer-term coverage shows that traders are betting on a credit event such as a near-term default.

New liquidity

According to Evan Mann, an analyst at bond-research firm Gimme Credit LLC, Ullman’s return ignited investor sentiment on the possibility of a turnaround at J.C. Penney Company, Inc. (NYSE:JCP). He said, “Ullman laid out a plan to return J.C. Penney to what it was. In the beginning, people were skeptical. Results have started to improve and he’s delivering on what he’s promised.” Mann added, “Risk of insolvency in the next couple of years has certainly diminished a lot.”

The new liquidity helped J.C. Penney maintain its bond ratings, and Standard & Poor’s recently affirmed its CCC+ rating, while Moody’s Investors’ Service maintained its equivalent Caa1 rating.

J.C. Penney Company, Inc. (NYSE:JCP) is seeking a $500 million term loan due in 2019, which would provide investors a 5.5% to 5.75% interest rate, according to KDP Investment Advisors, a high-yield debt researcher. Currently, the company is paying 6% on the $2.2 billion loan it obtained last year.

Leave a Comment