Ackman Down Over $180MM On JCPenney As CDS Crosses 1000 bps
While last night's earnings (and conference call) were anything but promising, credit markets appear to have grown even more concerned about JCP's future than the equity market. As Barclays notes that JCP will "likely need bridge liquidity", CDS on JCP has surged 90bps crossing the worrying 1000bps level (+1.5pts to 15pts upfront), implying fears of insolvency growing very fast. With Groupon having lost a quarter of its market-cap this morning, it appears JCP is not be outdone as it stock (and Ackman's dreams) cross the down 20% mark. The question is - will Icahn provide the DIP financing? Finally: why, oh why, can't JCP just expand its multiple a few turns: works for the S&P every day, and after all it's not like cash flow, or rather lack thereof, matters in the New Normal.
Via Barclays Credit:
We are reaffirming our Underweight recommendation on JCP. We expect sales trends, traffic, and margins to remain negative through the next two quarter as JCP undertakes the repositioning of its Home department, which we expect to be disruptive to the selling floor. JCP indicated it plans to continue to fund the transformation out of operating cash flow; however, we believe JCP is likely to need to bridge liquidity (or simply source liquidity) through drawing its credit facility by the second quarter. We fundamentally remain skeptical that the company will be able to drive the “trendsetters, starry-eyed, and sexy” (to use the company's branding of these targeted customers), into the shops (it is doubtful that this demographic knows what a pre-print advertisement is, in our view).
CDS trades points upfront but equivalent over 1000bps running now... while credit and equity trade in a non-linear fashion, the divergence is clear...