Bank Of Amerca Downgrades JCP Unsecured Notes On Dimishing Liquidity
There was much confusion about JCP's horrible results yesterday, with hope about the future and a certain pair trade lifting spirits if only briefly. Moments ago Bank of America, once again, reminded that it is all about liquidity, when it downgraded the Senior Unsecured Notes to Underweight - 70%.
Downgrading to UW-70% as liquidity concerns grow
JCPenney ended 2Q13 with adequate liquidity of $1.8 billion, which was $1.5 billion of cash and ~$300 million of availability on its ABL. Notably, the $300 million of availability has already taken into account that the company would only have access to 90% of the ABL ($1.665 billion). Management expects to end FY13 with approximately $1.5 billion of liquidity.
Downgrading to UW-70%
While we recognize that JCPenney currently has adequate liquidity, we anticipate that this liquidity will diminish in FY14. We estimate that JCPenney will produce negative free cash flow of $399 million during 2H13 and produce negative free cash flow of $394 million in FY14. We believe that the company still has potential options to increase its liquidity, including selling equity or modest sale/leasebacks. We believe that liquidity of $1.5 billion at year end is sufficient, but leaves little room for error in a turn-around. Therefore, we are reducing our rating on all JCP Sr Unsecured Notes to UW-70%.