Wednesday afternoon Moody’s (MCO) downgraded JC Penny’s (JCP) debt to Ba1, which is just below the threshold to be considered junk debt. Moody’s decided to take another look at JCP after they issued guidance in February that was very weak for the first quarter of 2009. Furthermore, Moody’s competitor, Fitch Ratings, downgraded JCP to one level above junk in February. The significance of this downgrade is clearly going to be higher borrowing costs for JC Penny going forward. The outlook is considered stable, which means that another ratings change is not expected for the next 12 to 18 months. Moody’s made the downgrade from Baa3 because they do not for see any improvement for JC Penny’s operating results until at least 2010. Moody’s statement said:
“JC Penny’s operating results will continue to decline in fiscal 2009 and are likely to remain below their historical levels over the near to medium term.”
JC Penny has suffered from an extremely weak consumer spending environment and in the past year had to give substantial markdowns in order to clear out this excess inventory. Those markdowns squeezed JC Penny’s already thin profit margins. Overall, JCP has been able to narrowly beat analysts estimates for the last four quarters, but the company is expected to swing to a loss in the current quarter.
Interestingly, the company has thus far refused to cut the quarterly dividend from 20 cents per share. Surely, if 2009 is as weak as the ratings agencies suggest, then a dividend cut will be extremely likely. Current estimates for the year are for JCP to make 1 penny for all of 2009; it would not be prudent to pay out 80x that in dividends. Especially given the fact that debt is not as cheap as it was at the beginning of the year.