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Moody’s Downgrades J.C. Penney’s Rating

The debt watchdog expects the retailer’s gross margins to “severely decline” in the fourth quarter as the company clears excess inventory.

Moody’s Investors Service sharply cut its credit rating on J.C. Penney Co. Inc. Tuesday.

The debt watchdog downgraded the retailer’s corporate family credit rating three notches to “B3” from “Ba3.” The new rating is described as “subject to high credit risk” under Moody’s scale. The outlook is negative.

Moody’s expects Penney’s gross margins will “severely decline” in the fourth quarter as the company clears excess inventory.

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The other major credit rating agencies, Standard & Poor’s and Fitch Ratings, each cut Penney’s rating by two notches earlier this month. Lower credit ratings could make it more expensive for the company to borrow money but do not have an immediate operational impact on the retailer.

Analysts have grown worried that Penney’s will have to dip into its credit facility to pay for chief executive officer Ron Johnson’s reinvention of the firm. Johnson is remaking what was a highly promotional department store into a specialty department store with branded shops and a different pricing model.

Moody’s expected comparable-store sales declines at Penney’s to improve modestly in the third quarter, but they worsened instead, falling 26.1 percent versus the 21.7 percent decline in the second quarter. The rating agency, however, noted that the company does not have debt coming due soon and also has “unencumbered assets” that give it financial leeway.

The weakness at the company and its race against time to remake its stores has gotten the rumor mill churning.

Shares of Penney’s gained 2.9 percent to $17.24 Tuesday as traders whispered about the possibility of a leveraged buyout of the firm.

One financial source said nothing appeared to be in the works but that a buyout down the line was possible.

“All the initiatives that J.C. Penney is trying are the kind of stuff that private companies do better than public companies,” the source said. “I’d have to believe that it’s somebody’s Plan B or C.”

Activist investor and Penney’s board member William Ackman controls 25.2 percent of the company’s stock and helped install Johnson in the corner office.

Spokeswomen at Penney’s and Ackman’s Pershing Square Capital Management said their companies do not comment on market rumors.