Significant widening in J.C. Penney's (JCP) five-year credit default swap (CDS) spreads underscores continued investor concern as the retailer struggles to find its footing, according to Fitch Solutions. Earlier this week, the company scaled back its partnership with Martha Stewart Living Omnimedia and last week denied rumors of bankruptcy.
JCP CDS spiked more than 300 basis points over the course of the last week and are now trading at record wide levels, according to Fitch Solutions. The sharp rise in cost to protect JCP's five-year senior bonds indicates that investors suspect a higher risk of default. We note that volatility across the board in CDS trading is common.
Fitch downgraded J.C. Penney Co., Inc.'s and J.C. Penney Corporation, Inc.'s issuer default ratings to 'CCC' from 'B-' on Oct. 2, which reflected higher than expected cash burn in 2013 and Fitch's concern that the projected free cash flow (FCF) shortfall in 2014 will require additional external funding, even with an over $3 billion liquidity injection so far this year (and a $850 million draw on its revolver).
Fitch now projects cash burn of $2.8 billion-$3.0 billion in 2013, a billion dollars higher than its mid May projections. This reflects EBITDA of negative $1.0 billion-$1.2 billion (versus prior projections of negative $0.5 billion) and higher than expected working capital use in excess of $0.5 billion.
Beyond 2013, Fitch estimates that the company will have to generate a minimum of $750 million-$875 million in EBITDA to fund ongoing capex in the $400 million-$500 million range and cash interest expense of $360 million-$375 million. This would require the company to return sales to about $13.4 billion-$13.6 billion -- 14%-16% above 2013 projected levels -- and realize gross margins in the 39%-40% range, assuming a relatively flat cost structure.
Tell us why we should trust Fitch again? I forgot. While you're at it, please tell us why
we should trust any hedge fund; or for that matter, why we should trust all these well-coordinated
attacks on JCP?