Midday Commentary: J.C. Penney bonds partly rebound as company denies vendor credit problem

By Paul Deckelman

New York, Aug. 1 - J.C. Penney Co. Inc.'s bonds and shares - which got hammered down on Wednesday following a news report that a key lender had cut credit to some of the vendors who provide merchandise for the underachieving department store chain - were partially rebounding on Thursday after Penney denied that any such thing was going on.

The Wednesday afternoon report had caused Penney's various junk bond issues to drop, although there was no great volume in the name and most of the trades were smallish odd-lot transactions.

Penney's most liquid outstanding issue, its 5.65% notes due 2020, slid from Tuesday's closing level around 80 bid down to 75¼ bid at the close Wednesday, a market source said, but had partially rebounded back up to just under 79 bid on Thursday morning.

The retailer's 7 5/8% notes due 2016 dropped to 89 7/8 bid at the close Wednesday from Tuesday's finish at 96 5/8 but were seen opening around the 94 level on Thursday morning, though they subsequently backed off a little, to the 92 bid area.

Penney's 7.4% bonds due 2037, which dipped a point or so to around 76 on Wednesday, had moved back up to around 78 on Thursday morning.

Penney's New York Stock Exchange-traded shares - which lost $1.66 on Wednesday, or over 10% of their value as they closed at $14.60 - were seen up by 30 cents, or 2.06% on Thursday morning, to $14.90. Volume of over 11 million shares was running about 20% above the norm.

While the New York Post had reported on Wednesday that CIT Group Inc. had stopped credit to the vendors, Plano, Texas-based Penney said in a statement Thursday that the news report of such a credit crunch "is untrue," adding that it "has been told so directly by CIT, the subject of that report.

"Contrary to the news report, CIT continues to factor and support deliveries from J.C. Penney suppliers. In fact, J.C. Penney continues to have the support of all of its key vendors, who have maintained their shipments to the company," Penney said.

In any event, the statement continued, CIT-factored merchandise currently represents less than 4% of the company's overall inventory for the year. It further declared that the retailer "continues to have ample liquidity to manage its business with expectations to close the quarter with approximately $1.5 billion in cash on its balance sheet."

Shortly before the financial markets closed on Wednesday, the newspaper's online edition reported that New York-based CIT - the largest commercial lender in the U.S. apparel industry - "has abruptly stopped financing deliveries from smaller manufacturers to Penney stores."

The newspaper said that the credit crackdown, affecting future orders but not those already in the pipeline, followed a Tuesday meeting between Penney and CIT executives; it quoted unidentified "insiders" who speculated that the lender was apparently dismayed by the store chain's continued weak sales.

Penney is struggling to turn its situation around after a series of failed merchandising initiatives put in place by its former chief executive, Ron Johnson - who was ousted from the company's top spot earlier this year and replaced by former CEO Mike Ullman.

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