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Penney leaning toward $1 billion equity raise: sources

A woman checks her phone outside the entrance of a J.C. Penney store in New York in this file photo August 14, 2013. REUTERS/Brendan McDermid/Files

By Olivia Oran and Phil Wahba

(Reuters) - J.C. Penney Company Inc (JCP) is looking to raise as much $750 million to $1 billion in new equity to build up its cash reserves as the holiday season approaches, according to three people with knowledge of the matter.

Penney, whose shares have fallen 49 percent so far this year, has a market value of $2.6 billion. The U.S. department store chain is leaning toward issuing new shares, the sources said, although other methods of raising capital are also on the table.

The company declined to comment.

Penney's sales dropped 25 percent last year after it eliminated coupons and jettisoned merchandise that was popular with long-time customers but didn't fit into former Chief Executive Ron Johnson's plan to offer trendier items.

Even after Penney reinstated its old pricing strategy in the spring, sales again fell.

The company's shares tumbled 15 percent on Wednesday after Goldman Sachs said in a research note it expects the retailer's sales to improve more slowly than expected through the end of the year. In intraday trading on Wednesday, the shares dropped to a 13-year low.

The note also raised questions about Penney's liquidity.

"In order to safeguard against a potentially poor 4Q (fourth-quarter) holiday season, it is likely that management will look to build a bigger liquidity buffer," Goldman analyst Kristen McDuffy wrote in her note on Wednesday.

Earlier this year, Goldman arranged a $2.25 billion loan for Penney to shore up its finances.

Last month, Penney said it expected to have $1.5 billion in cash at the end of its fiscal year on February 1, enough to have ample merchandise on shelves.

The cost for insurance against a J.C. Penney default has shot back to near record-high levels during the last week. With about $2.6 billion in bonds outstanding, the company has a "CCC+" credit rating from Standard & Poor's, reflecting a substantial risk in owning its debt.

The company's benchmark five-year credit default swap contract price surged by more than 13 percent on Wednesday, according to Markit data. The cost to insure $10 million of Penney bonds against a default for five years now requires an upfront payment of about $2.2 million plus quarterly payments of about $300,000 for the duration of the contract. The contract's pricing reflects a default probability of nearly 65 percent.

(Reporting by Olivia Oran, Phil Wahba and Dan Burns; Editing by Jilian Mincer and Steve Orlofsky)