Investor concerns following a report about widening of credit default swap spreads sent shares of J.C. Penney Co. Inc. down 4.1 percent to $6.75 in Big Board trading Thursday.
This story first appeared in the October 25, 2013 issue of WWD. Subscribe Today.
Credit ratings agency Fitch Solutions said the retailer’s five-year credit default swap spreads had widened, and noted that this underscores “continued investor concern as the retailer struggles to find its footing.”
The sharp rise in cost to protect Penney’s five-year senior bonds indicate that investors suspect a higher risk of default, Fitch added.
Volatility across the board in CDS trading is common. In the case of Penney’s, its shares have been slipping in the past week due to bankruptcy rumors, Canadian credit pullback rumblings and the scaling back of its partnership with Martha Stewart Living Omnimedia Inc.
On Thursday Fitch said it is now projecting a cash burn of $2.8 billion to $3 billion in 2013, about $1 billion higher than its mid-May estimate. The ratings firm said that beyond 2013, Penney’s will have to generate a minimum of $750 million to $875 million in earnings before interest, taxes, depreciation and amortization to fund ongoing capital expenditures in the $400 million to $500 million range and cash interest expense of $360 million to $375 million. Sales would have to be in the $13.4 billion to $13.6 billion range, or 14 percent to 16 percent above 2013 projected levels.
Fitch concluded that the minimum EBITDA and sales range requirement “appears highly ambitious” given the execution risk.
Fitch also said Penney’s real estate portfolio, appraised at more than $4 billion, includes properties owned and leased. The retailer owns 306 stores, operates 123 ground leased stores and leases 675 stores. The retailer also owns nine distribution centers and leases another six.
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