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J.C. Penney Investigating Debt Options Ahead of Holidays

J.C. Penney Co. Inc. is hoping to buy itself some wiggle room as it considers how to improve a capital structure questioned by experts and lighten a staggering debt load sooner than rather than later.

The move to shore up its financial structure follows a corporate credit downgrade on Wednesday from Fitch Ratings, the credit ratings firm. The downgrade to “CCC+” from “B-” indicates a high risk that Penney’s could default on its $1.6 billion loan, according to Fitch.

Over the summer the department store chain began talks with advisors about exploring its options, and now it appears discussions could begin soon with the bondholders, according Bloomberg, which said advisors and bondholders were close to signing nondisclosure agreements. J.C. Penney’s $4 billion in debt will come due over the next few years.

Penney’s, Fitch said, has adequate near-term liquidity to fund seasonal working capital needs and pay down some of its moderate term debt maturities. However, declining comps sales and negative free cash flow projections indicate that liquidity could shrink from over $1.5 billion at the end of 2019 to the $1.2 billion range by the end of 2020.

Reworking Penney’s capital structure would offer a bit of breathing room by easing financial pressure, as well as buying more time to effect a workable turnaround strategy.

Jill Soltau came aboard last year as CEO to navigate the retailer’s restructuring process. So far she has pulled hardlines categories such as appliances and furniture to focus on softlines, such as apparel and home soft textiles. But now she faces the formidable task of bringing back former customers who have found new retailers to shop, as well as figuring out how to attract new, younger consumers to J.C. Penney.

When the retailer reported second-quarter results last month, Soltau told Wall Street analysts that her job was not only to grow sales but also to reconstruct the business.

The upcoming holiday season serves as an important litmus test for all retailers because a robust selling period can compensate for shortfalls earlier in the year. But J.C. Penney requires a strong year-end frame if it wants to restore investor confidence.

Even a mediocre season could end up sending the wrong message that the retailer doesn’t have a viable plan in place or that it could run out of time before it can get to where it needs to be so it can claim retail survivor status.