J.C. Penney Is Refinancing Some Debt

(The Dallas Morning News/MCT) -

J.C. Penney is raising new debt to pay off notes that begin to come due next year.

Plano, Texas-based Penney said Tuesday it will issue $350 million in new notes due in 2019. It plans to use up to $300 million of those funds to retire some of the $585 million in notes due in 2015, 2016 and 2017.

The move gives Penney more financial flexibility while it tries to become profitable again and to begin to pay down more than $5 billion in debt. Much of that debt was accumulated during its failed attempt in 2012 and 2013 to reinvent the department store.

Standard & Poor’s analyst Tobias Crabtree said Tuesday the move is neutral from a credit-rating perspective since it doesn’t reduce Penney’s debt.

S&P said its junk status corporate-debt rating of CCC+ assigned to the company reflects its “significant debt burden and high degree of uncertainty that it will be able to return to profitability and positive free cash flow in a highly competitive, challenging retail environment.”

The short-term outlook was more stable: The credit-rating agency also said it believes J.C. Penney’s “financial commitments over the next year, including interest, debt maturities, and capital expenditures, are manageable given the company’s sizeable cash balances and available liquidity.”

Fitch Ratings, which rates Penney’s corporate debt similar to S&P, gave Penney’s proposed five-year $350 million senior unsecured notes a rating outlook of positive.

A positive rating change could occur, said Fitch analyst Monica Aggarwal, if Penney can generate enough operating profit to cover its projected capital spending and interest expense at a total of $600 million to $650 million and has enough liquidity to manage or successfully refinance debt maturities of $200 million annually in 2015 and 2016.

Moody’s said its negative rating outlook acknowledges Penney’s very weak interest coverage and ongoing operating losses and its $200 million near dated debt maturity, which will be a drain on cash should it not be refinanced. Penney’s nearest debt maturity is in October 2015, when its $200 million, 6.875 percent medium-term notes mature.

“Given the negative outlook, an upgrade is unlikely at the present time,” said Moody’s analyst Margaret Taylor. “However, the outlook would return to stable should the company successfully complete the refinancing of the proposed senior unsecured notes such that it is able to fully cover its 2015 debt maturity.”