When we reported on JCPenney's horrendous quarterly results [7], we made the comments that when "speaking of [the] credit facility, JCP had no borrowings under its 2012 Revolver, and about $1.3 billion available net of L/Cs. Expect these numbers to change." The reason we pointed this out, is that the second a retailer goes from "unused Revolver" to "used Revolver", the bankruptcy deathwatch drums begin their steady beat. Indeed, it was only a matter of time before even the traditionally slow sellside brigade figured out that JCP's liquidity is horrifying and about to get much worse, and moments ago Bank of America downgraded JCP by $3 to a $13 price target on expectations of an imminent revolver draw. To wit: "JCPenney intends to self-fund its transformation, but we think it will
need to draw down on the revolver as early as this quarter." This explains why Ackman is down another $60 million in the name at last check.
From Bank of America's Lorraine Huttchinson
Important shareholder begins liquidating stake; lowering PO
Vornado sells; lowering PO to reflect pressure on stock
Last night, the WSJ reported that Vornado (VNO), JCPenney’s third largest shareholder, is liquidating 10mn shares of JCPenney (54% of its 18.5mn share stake). Vornado’s CEO resigned last week and JCPenney was discussed on Vornado’s earnings call as being on Vornado’s “for-sale” list. Vornado was not willing to discuss a time frame for exiting its investment due to a conflict of interest (Steven Roth is on JCPenney’s board). We think Vornado could be back in the market in the near term to sell its remaining 8.6mn shares. Our work indicates that monetizing JCPenney’s real estate would be difficult and substantially less lucrative than the market initially thought.
We are lowering our PO by $3 to $13 as we think the stock will remain under pressure due to deteriorating investor confidence in JCPenney’s turnaround, and we reiterate our Underperform rating.
Time to put the real estate thesis to bed
In our recent department store real estate note, we evaluated the likelihood of JCPenney splitting itself into two publicly traded companies -- a standalone REIT and an operating company. We concluded that JCPenney’s retail fundamentals are not sound enough to support a stand alone operating company and we do not think REIT investors have an appetite for owning single tenant mall anchor real estate. Vornado’s liquidation of its JCPenney stake supports our view that this was simply a non-core investment, without strategic purposes.
Expect revolver draw in 2013, but ample liquidity for now
JCPenney's balance sheet looks OK today but deteriorating fundamentals should cause pressure in 2013. The company has access to $3.1bn of liquidity including $0.85bn of cash (excluding deferred vendor payments made in 1Q), $1.85bn of revolver capacity, and a $0.4bn accordion on the revolver. JCPenney intends to self-fund its transformation, but we think it will need to draw down on the revolver as early as this quarter