JCPenney credit issues?
It is not known here whether JCPenney already has serious credit issues. Maybe not yet, but even a whiff of a rumor that they do is at least a minor disaster for this troubled company. The comment floating around yesterday was that factors, mainly CIT, were not financing trade credit of their suppliers(factors buy trade receivables from suppliers at a discount, usually 60 to 90 day paper). That concern led to a $2 drop in the JCP stock price, more than a 12% decline in one day. That's huge and troubling. The decline continued today at a more modest level.
It, of course, forced a response from the company which said that only their smallest suppliers, representing just 4% of their total, had run into some reluctance to finance their shipments to JCP. The market reaction was "so there is some truth to this concern" and it was not reassured by the company statement.
To the extent that there is an issue, perhaps one cause of the issue is the structure of their credit availability. In late April, Goldman Sachs led a group of banks that extended the JCP revolving credit facility, increasing it from $2 billion to $2.25 billion and keeping the same terms. What changed was the collateral required as JCP pledged the majority of their real estate assets to back up the facility.
Factors are essentially taking pure JCP credit risk when they buy short term receivables from trade suppliers. While these types of these very short term trade credits do not have access to collateral, the factors do analyze the credit condition of the companies whose credit they take on. It is not far fetched to think that this credit analysis would take into account the amount of wealth under a company's control as well as its ongoing operating condition and its balance of viable inventory and cash against its short term liabilities. Now, that wealth cushion has been pledged to banks to secure longer term financing.
The longer term financing being in place and secured could be viewed as good news by the factors under normal or even predictably stressed operating conditions, but in a full blown credit crisis it could leave them out in the cold.
Discussion about this is just about the last thing JCP needs at the moment.
Postscript --- see June 29th post here, "JCPenney's Turnadown", for an earlier comment on JCP.
It, of course, forced a response from the company which said that only their smallest suppliers, representing just 4% of their total, had run into some reluctance to finance their shipments to JCP. The market reaction was "so there is some truth to this concern" and it was not reassured by the company statement.
To the extent that there is an issue, perhaps one cause of the issue is the structure of their credit availability. In late April, Goldman Sachs led a group of banks that extended the JCP revolving credit facility, increasing it from $2 billion to $2.25 billion and keeping the same terms. What changed was the collateral required as JCP pledged the majority of their real estate assets to back up the facility.
Factors are essentially taking pure JCP credit risk when they buy short term receivables from trade suppliers. While these types of these very short term trade credits do not have access to collateral, the factors do analyze the credit condition of the companies whose credit they take on. It is not far fetched to think that this credit analysis would take into account the amount of wealth under a company's control as well as its ongoing operating condition and its balance of viable inventory and cash against its short term liabilities. Now, that wealth cushion has been pledged to banks to secure longer term financing.
The longer term financing being in place and secured could be viewed as good news by the factors under normal or even predictably stressed operating conditions, but in a full blown credit crisis it could leave them out in the cold.
Discussion about this is just about the last thing JCP needs at the moment.
Postscript --- see June 29th post here, "JCPenney's Turnadown", for an earlier comment on JCP.
posted by John Borden at 5:38 PM
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