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JCPenney Downgraded Deeper Into Junk Status as Debt Woes Worsen

Even before the coronavirus swept the United States, market watchers had already appeared to have lost faith in JCPenney Company. Now, the retailer faces even more turmoil as debt woes have led one of the country’s top credit agencies to downgrade its business.

In a release yesterday, Moody’s Investor Service lowered the beleaguered company’s credit rating even deeper to junk status to Caa3 from Caa1. Both classifications represent poor quality and very high credit risk — with Caa3 only one rating away from Ca, which is issued to companies that have the likelihood of being near or are in default but maintain some possibility of recovering principal and interest.

“Although JCPenney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure JCPenney’s EBITDA [earnings before interest, taxes, depreciation and amortization], impede its turnaround strategy and weaken its leverage to unsustainably high levels,” said Moody’s VP Christina Boni.

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The agency also changed its outlook for the company to negative, reflecting the challenges posed to its business by the novel coronavirus. Two weeks after shuttering its 850 stores in mid-March due to government-mandated closures, JCPenney announced that it would furlough scores of workers and take additional actions to maintain its financial flexibility. It deferred capital spend and tapped $1.25 billion from its $2.35 billion revolving credit line, as well as cut expenditures and paused hiring efforts. The retailer added that it had suspended merit bonuses for the year and was “evaluating other financial options.”

According to a report published yesterday by Bloomberg, JCPenney has hired the consultancy AlixPartners LLP to help it manage its hefty debt load of about $4 billion. The Plano, Texas-based chain, which is said to have been in talks with its banks over the past few weeks regarding liquidity needs, is reportedly also negotiating a potential debt deal with lenders.

For several quarters, JCPenney had already been at risk of being delisted from the New York Stock Exchange as declining sales, leadership changes and digital competition spooked investors and pushed its stock below $1.

In February, the company ended up on the S&P Global Market Intelligence’s list of the “most vulnerable” publicly traded retailers.

As the pandemic continues to weigh on the discretionary retail sector, Moody’s forecasts that JCPenney’s EBITDA could decline more than 80% in the fiscal year before a slow recovery in 2021. Analysts are predicting that it won’t be until “well into 2022” before the company returns to the $600 million EBITDA that it had in 2019.

“As a result, JCPenney’s leverage will remain at unsustainably high levels over the next two years. In addition, the company’s work to define and execute its strategy to return to stabilizing its market position and improving profitability will be difficult in the current operating environment,” the agency said. “The credit is also constrained by the structural challenges facing the department store segment, which include market share losses to off-price retailers and the continued increase in online sales penetration.”

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