Credit-default swaps tied to the debt of J.C. Penney Co. (JCP) rose after the retailer said it drew $850 million from its $1.85 billion revolving credit line as it works to raise capital.
Five-year contracts linked to the retailer rose 1.3 percentage points to 15.3 percent upfront at 8:49 a.m. in New York, according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That means it would cost $1.53 million initially and $500,000 annually to protect $10 million of obligations.
Proceeds from the credit facility will be used to fund capital spending and replenish inventory, J.C. Penney said in a statement today, as the department-store chain opens newly renovated home departments next month. J.C. Penney is evaluating a range of options to raise at least $1 billion, including selling a stake to a private-equity firm and has hired Blackstone Group LP to help it with the process, people familiar with the matter said last week.
Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Creditors have been fleeing J.C. Penney, whose debt rating Standard & Poor’s cut Feb. 28 to CCC+, a grade that indicates vulnerability to nonpayment. The company’s cash position declined to $930 million in the quarter ended Feb. 2 from $1.51 billion a year earlier.
J.C. Penney ousted Chief Executive Ron Johnson on April 8 after a dismal first year on the job and reinstated his predecessor, Myron E. Ullman III. Sales in the year ended Feb. 2 plunged 25 percent to $13 billion, the lowest since at least 1987.
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