Moody’s Investors Service hit J.C. Penney Co. Inc. with a credit downgrade after the company took on a new $1.75 billion loan.
The retailer’s long-term rating was cut to “Caa1” from “B3.” Ratings in the “Caa” scale are judged to be of “poor standing” by Moody’s. About $2.9 billion in debt was covered by the downgrade, and the outlook on the rating remains negative.
Last month Penney’s drew down $850 million from its credit facility and arranged with Goldman Sachs the $1.75 billion term loan, which is secured by a first lien on the company’s real estate and a second lien on its inventory and accounts receivable.
“Although the term loan bolsters JCP’s liquidity, it will not solve JCP’s longer-term performance concerns nor reduce the level of anticipated cash burn at JCP over the next twelve months,” Moody’s said. “The downgrade acknowledges that the term loan will greatly weaken JCP’s capital structure at a time when its earnings are at precarious levels.”
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Money from the Goldman loan will go toward working capital requirement and to satisfy bonds that were set to expire in 2023. Penney’s on Tuesday kicked off a cash tender offer from the 7.125 percent debt. Holders of that debt are being asked to approve amendments to its terms and therefore are getting a premium.
“The total consideration consists of an amount equal to $1,300 per $1,000 principal amount of notes, plus a consent payment in an amount equal to $50 per $1,000 principal amount of notes,” Penney’s said.