Analysts mixed on Penney's move to up liquidity

Analysts offer mixed views on JC Penney's move to raise credit facility

Associated Press

NEW YORK (AP) -- Analysts are offering a mixed assessment of J.C. Penney Co.'s move to raise its credit facility and boost liquidity as the struggling department store chain looks for more flexibility in financing its multiyear transformation.

The department store chain said late Tuesday it expanded its credit facility to $1.85 billion and got an option to increase that by another $400 million. The total borrowing capacity is now up to $2.25 billion.

On Jan. 31, the Plano, Texas-based company exercised the $250 million "accordion" option under its prior credit agreement to increase the size of its prior facility to $1.75 billion.

Penney said that the increase enhances its liquidity and provides it with additional financial flexibility to support its transformation.

It comes more than a week after Penney announced that it received a letter from a law firm representing a group of the company's bondholders alleging it violated an inventory-secured credit agreement. Penney said at the time that the notice of default was "invalid" and filed a suit to block the claim.

"So are Penney and its bankers more worried about the bondholders' claim than they were a week ago or is Penney just really bad at estimating how much cash it may need?" Carol Levenson, director of research at Gimme Credit, a bond research firm, asked in a report. "A little of both, we suspect. Again, we note these hurried actions are not indicative of a financially healthy company."

But Deborah L. Weinswig of Citi Investment Research noted in a report she found Penney's move to expand its credit facility encouraging for several reasons.

Weinswig noted it gives Penney greater access to liquidity, if needed, to fund its transformation. She noted the company hasn't tapped its credit facility to date, calming concerns among investors that it had. And she said the Penney's ability to increase its credit facility shows that banks continue to be willing to lend to the company.

This month marks Penney's one-year anniversary of a radical plan to get rid of most sales in favor of every day prices. The strategy is part of an overall plan spearheaded by CEO Ron Johnson to transform every part of the business from the brands it carries to the store experience.

But the overhaul has been more challenging than expected. Penney is expected to report on Feb. 27 its fourth consecutive quarter of big sales drops and net losses since it implemented its new pricing strategy. The worry is that Penney won't be able to stem the decline in sales in time to finance the transformation of the stores. Late last year, it started rolling out shops within its stores. It plans to carve up its stores into 100 specialty shops by late 2015.

Weinswig noted in her report that she expects the company to spend about $1 billion in capital expenditures to primarily fund the continued rollout of the shops as well as invest in technology.

"As we enter the second year of our transformation, today's announcement reflects the confidence of our banking group in our long-term strategy and further strengthens our liquidity position as we continue to execute our plan," said Ken Hannah, Penney's chief financial officer, in a statement. The company said no funds have been drawn under the agreement.

J.P. Morgan Securities LLC, Bank of America Merrill Lynch, Barclays Capital and Wells Fargo Capital Finance arranged the financing transaction.

Shares rose 34 cents to close at $19.61 Wednesday. Investors have sent shares of Penney down more than 55 percent from a peak of $43 in the days after the plan was rolled out in February 2012.

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