NEW YORK--(BUSINESS WIRE)--J.C. Penney Co. Inc. (J.C. Penney) Monday said it drew down $850 million from its $1.85 billion revolving credit facility. Fitch Ratings views this as a stop-gap measure before permanent financing is put in place. We believe J.C. Penney will need to tap into additional funding to cover a projected free cash flow (FCF) shortfall of $1.3 billion to $1.5 billion in 2013, which could begin to strain its existing sources of liquidity. Upside or downside to our FCF estimate will depend on the speed and effectiveness of critical decisions over the next weeks around pricing strategy, merchandising decisions (what new shops to build out and what to forego), and capital expenditures.
While the draw itself has no immediate credit impact, we will continue to closely monitor the company's liquidity position. We downgraded the Issuer Default Ratings (IDRs) on J.C. Penney and J.C. Penney Corporation, Inc. to 'B-' from 'B' on February 28 and the Rating Outlook is Negative.
Our primary concern remains with the company's ability to secure the $1 billion or so needed in permanent financing in 2013 to fund operations and peak seasonal working capital needs. We expect J.C. Penney will need to tap into various sources of funding including equity infusion.
Under its $1.85 billion credit facility, J.C. Penney is permitted to issue up to $1.75 billion in debt to be secured by a second lien on the asset-backed revolver collateral and a first lien on other assets. The company owns 429 stores (including 123 located on-ground leases), 12.2 million square feet of distribution center, regional warehouse, and fulfillment center space, and its Plano Texas headquarters with 240 acres (or 10.5 million square feet) of adjacent land that are all currently unencumbered. To the extent that the 1982 indenture governing the 7.125% debentures due 2023 (under which the company has to maintain a ratio of net tangible assets to senior funded indebtedness of 2.0x and above) proves to be too restrictive for the company to incur additional debt, J.C. Penney could potentially use any new debt proceeds to repay the $255 million in outstanding debt under this indenture.
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