JC Penney sees CDS tighten in latest swing

Wed Apr 10, 2013 11:29am EDT

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NEW YORK, Apr 10 (IFR) - The CDS of troubled retailer JC Penney consolidated and tightened to 915 on Wednesday, the latest swing in days of volatility that saw the ouster of CEO Ron Johnson.

The 2.75% tightening followed an opposite 5% move wider on Tuesday as the market tries to get to grips with the uncertain future of JCP, which brought back Johnson's predecessor Mike Ullman as CEO to help right the ship.

CDS, or credit default swaps, are protection against a company defaulting on its debt. Tightening means the cost of that protection has become cheaper, and reflects greater investor confidence in the company.

Brian McGough, retail sector head at Hedgeye Risk Management, said that risks have increased for the company, particularly as it has no capital to execute a new corporate strategy.

With Johnson out, he said, the company "can't shake an Etch-A-Sketch and start a brand new strategy".

And the lack of capital is not the only headwind facing the troubled retailer. Questions about the direction in which Ullman will take the company have naturally surfaced, since Johnson's "store-in-store" vision was already under way - and had required a substantial paring of JCP's vendor base from around 400 to 100.

These vendors forged their relationship with Johnson, and are willing to be subject to a 1% to 2% surcharge to loans made to finance apparel deliveries to the retail store by CIT Group.

"If 10 or 20 of these big guys cut out, then what?" McGough said. "Johnson fired a big portion of the vendor base, and if there are no goods on the shelf, they're backed in a corner and have a very big problem."

Reports prior to the management ouster suggested private equity was mulling a purchase of the company, but JCP is not considered a viable LBO candidate.

"A strategic buyer for JCP, no. But a financial buyer, yes," said McGough.

"If a buyer were to go out and purchase a company such as Kohl's, they might pay a premium of around USD18bn. But for JCP, you might get it for around USD5bn. Then, you recapitalize with about USD2bn to USD3bn."

Ullman "might be there to put the lipstick on the pig," McGough said, in order to buy time for some type of sale.

He suggested JCP could buy itself some time via real estate sales or leases, being able to pick up around USD1bn-USD1.5bn in cash, albeit less rent, if it offloaded some of its roughly 300 locations.

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