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With Virus Stalling Turnaround, JCP Sees Credit Rating Suffer

Moody’s downgraded J.C. Penney Co. Inc.’s corporate family rating as the retailer reportedly explores debt deal options.

On Monday, the credit ratings firm lowered the retailer’s corporate family rating to “Caa3” from “Caa1,” and downgraded other ratings, such as its senior secured ABL Revolving credit facility and senior term loan notes. Moody’s also revised Penney’s rating outlook to negative from stable.

“Although J.C. Penney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure J.C. Penney’s EBITDA (earnings before interest, taxes, depreciation and amortization), impede its turnaround strategy and weaken its leverage to unsustainably high levels,” Moody’s vice president Christina Bona said.

Weaknesses in Penney’s credit profile, including its exposure to unit closures, have left it vulnerable to shifts in market sentiment in the current unprecedented operation conditions, and the retailer “remains vulnerable to the outbreak continuing to spread,” Moody’s said.

While the company has sizable cash balances after drawing $1.25 billion on its $2.35 billion revolver plus its $386 million of cash on hand, “Moody’s expects the company will have significant cash flow deficits in fiscal 2020 as EBITDA declines from the effect of COVID-19 on store traffic and continuing weak consumer demand hurts results,” the credit ratings agency said, noting that it could take well into 2022 before EBITDA reverts back to the $600 million of EBITDA realized in 2019.

“In addition, the company’s work to define and execute it strategy to return to stabilizing its market position and improving profitability will be difficult in the current operating environment,” the ratings firm said.

The embattled retailer allegedly hired consulting firm AlixPartners to help it explore options for its $4 billion debt load, Bloomberg reported Monday. The consulting firm would be working with restructuring advisors at the Kirkland & Ellis law firm and investment banking advisor Lazard Ltd, the same team said to be aligned with Macy’s on its own exploratory quest.

A spokeswoman declined to comment on reports of the AlixPartners hire.

Penney’s, like most non-essential retailers, has temporarily shuttered its stores to help curtail the spread of the coronavirus outbreak. Last month, the mass merchant furloughed the majority of its store employees and a significant portion of corporate associates at headquarters.