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Fitch: JCP Default Fears Evident as Credit Protection Rises

January 21, 2014, 07:04 AM
Filed Under: Corporate Ratings

Widening in J.C. Penney's (JCP) five-year credit default swap (CDS) spreads underscores continued investor concern, according to Fitch Solutions. The retailer said last week it would close 33 stores nationwide and cut 2,000 jobs as it struggles to resuscitate revenue growth.

JCP CDS gapped out 111 basis points over the course of the past month, with a 29 basis point jump recorded Thursday. The sharp rise in cost to protect JCP's five-year senior bonds reflected investor disappointment on the holiday sales update, which did not provide much details on December performance besides saying that performance is in line with expectations and would be better than 3Q results. JCP CDS hit record wide levels in October of last year after the company scaled back its partnership with Martha Stewart Living Omnimedia and denied rumors of bankruptcy. Volatility across the board in CDS trading is common.

Fitch lowered J.C. Penney's issuer default ratings to 'CCC' from 'B-' on Oct. 2. The downgrade reflected higher than expected cash burn in 2013 and Fitch's concern that the projected free cash flow shortfall in 2014 will require additional external funding.

JCP isn't the only struggling retailer. The cost of credit protection for Sears Roebuck Acceptance Corp. this week climbed to levels not seen in nearly two years. Sears CDS widened 39% over the past month, according to Fitch Solutions.

Sears CDS significantly underperformed the 9% CDS tightening for the broader North America Retail CDS Index over the same time period. Worsening sentiment for Sears is likely attributed to dismal holiday sales of $284 million and an EBITDA expectation of negative $414 million (compared to $626 million last year), even worse than Fitch's expectation of negative $200 million.

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