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'Wonky' Loan Debacle Spooks J.C. Penney’s Lenders, Investors

J.C. Penney Co. faced a wild ride this past week. First, a clerical mistake widened spreads on JCP credit default swaps when it was discovered loans collateralized by 61 properties were parked under the wrong JCP business entity. 

After J.C. Penney eased market fears on this particular issue, it was hit with more bad news as Moody's Investors Service predicted more store closures for the Plano, Texas-based retailer. 


JCP's Missing Properties Debacle

J.C. Penney's March Madness kicked off when the retailer informed lenders that 61 properties serving as collateral on certain loans were residing with the wrong corporate entity, Debtwire analyst Reshmi Basu said.  

While the market long believed these loans belonged to the entity known as JCP Properties, the assets were actually sitting with JCP Corp., another separate business entity, Basu said.  

While it was just a clerical mistake, the revelation sparked panic, since at first glance the collateral appeared to be separated from the debt.

“One could argue that it kind of changes the valuation analysis,” Basu said.

The collateral snafu rattled the credit default swap market enough to push JCP CDS spreads apart for a day by nearly seven points. Widening credit spreads generally signal the market's wariness of a company's ability to service its debt. 

“When [the news] first broke, the one-year CDS widened,” Basu told Bisnow. “It widened quite a bit.” 

The timing of the announcement also surprised Basu —  J.C. Penney named Bill Wafford as its new chief financial officer just a day before.   

The Plano-based retailer calmed the storm quickly, releasing a statement saying it "recognized there are some discrepancies in the stated ownership of certain interests in real estate."

But the company said the mistake came with no material problem.

"We can confirm to you that there are no inter-company transfers of real property between 2013 and 2016 and all of the properties required to be mortgaged on the Restatement Effective Date have been mortgaged by the proper grantor."

Basu said the initial shock wore off quickly, although she expects analysts to watch the situation closely.

"It's kind of a wonky situation. We don't see this too often in our space," Basu said. "It seems like days after the lenders kind of digested the news, they did not seem to be as anxious about it." 

But as J.C. Penney cleared up one problem, commercial mortgage-backed securities investors learned that Moody's Investors Service is predicting additional store closings. 


Moody's Praises J.C. Penney's Liquidity, But Challenges Remain

In addition to 27 store closings already announced this year, J.C. Penney is likely to cull more stores to support its turnaround plan, analysts with Moody's Investors Service said in its latest report. 

The retailer has 846 stores nationwide, but with $2B in liquidity from revolver availability and cash, Moody's believes the new CEO and new chief financial officer will implement a turnaround plan that includes the shuttering of more brick-and-mortar stores. 

“The company’s newly appointed CEO, Jill Soltau, is reviewing the business to identify the most productive use of the company’s square footage," the Moody's analysts said. "Management also will have to consider its box size and whether some stores would benefit from being partly walled off without inventory."

Store closings continue to haunt CMBS investors. Those most impacted have loans tied to malls and shopping centers where JCPenney is an anchor tenant. 

Still, this particular risk is contained, Moody's said. 

JCPenney represents one of the largest risk exposures among individual tenants in the CMBS market, but it is manageable as long as exposed shopping centers or malls maintain a healthy mix of other tenants, Moody’s said.

The overall risk to CMBS loans tied to J.C. Penney is contingent on “the health of the properties where the JCP is a tenant," Moody’s concluded. “The worst performing, those with multiple vacant anchors and a JCP, total just 0.5% of CMBS we rate.”