Midday Commentary: J.C. Penney bonds struggle despite company denial of vendor credit problems

By Paul Deckelman

New York, Aug. 2 - J.C. Penney Co. Inc.'s bonds remained under pressure on Friday morning - this despite the underperforming retailer's Thursday denial of a news report claiming that a key lender had cut credit to some of the vendors who provide merchandise for the department store chain.

The denial had initially given the company's bonds a boost from the low levels to which they had fallen late Wednesday after that negative report first came out - but those early gains did not last and most Penney issues ended Thursday having moved lower, and that negative momentum continued into Friday.

Penney's most liquid outstanding issue, its 5.65% notes due 2020, was being quoted at mid-morning on Friday at around the 75½ bid mark. Those bonds had been trading above 80 before the news report came out, then dipped to 75 post-news on Wednesday. Although they struggled to get back to around a 77 close Thursday, they again lost ground early Friday on relatively small odd-lot transactions.

That was also pretty much the case with Penney's other issues.

The retailer's 7 5/8% notes due 2016 were seen on Friday morning trading around 90½ bid, down about a half point from Thursday's close, and well down from levels around 96 5/8 see late Tuesday, the last session before the negative news report came out. The bonds had nosedived to below 90 following the news report and have gyrated around down there ever since.

The company's 7.4% bonds due 2037, which dipped a point or so to around 76 on Wednesday, had moved back up to around 78 on Thursday morning but then surrendered those gains to close at 75 bid and were not seen trading so far on Friday.

Another issue at the long end of the curve, the 6 3/8% bonds due 2036, were quoted at 72 bid early Friday, about where they had ended on Thursday and well down from 76 bid before the news report.

Penney's New York Stock Exchange-traded shares lost $1.66 on Wednesday, or over 10% of their value as they closed at $14.60 down from $16.26 on Tuesday. They had gotten as good as $14.90 early Thursday before sliding from that peak to end at $14.58 and were seen early Friday down another 7 cents, or 0.48%, at $14.51.

The New York Post had reported shortly before the financial markets closed on Wednesday that CIT Group Inc. - the largest commercial lender in the U.S. apparel industry - had abruptly stopped financing deliveries from smaller manufacturers to Penney stores. It said that the credit crackdown, affecting future orders but not those already in the pipeline, followed a Tuesday meeting between Penney and CIT executives; it quoted unidentified "insiders" who speculated that the lender was apparently dismayed by the store chain's continued weak sales.

Penney is struggling to turn its situation around after a series of failed merchandising initiatives put in place by its former chief executive, Ron Johnson - who was ousted from the company's top spot earlier this year and replaced by former CEO Mike Ullman.

Plano, Texas-based Penney said in a statement Thursday that the news report of such a credit crunch "is untrue," adding that it "has been told so directly by CIT, the subject of that report.

"Contrary to the news report, CIT continues to factor and support deliveries from J.C. Penney suppliers. In fact, J.C. Penney continues to have the support of all of its key vendors, who have maintained their shipments to the company," Penney said.

In any event, the statement continued, CIT-factored merchandise currently represents less than 4% of the company's overall inventory for the year. It further declared that the retailer "continues to have ample liquidity to manage its business with expectations to close the quarter with approximately $1.5 [billion] in cash on its balance sheet."

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