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
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
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
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,"
"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