NEW YORK, Sept 10 (IFR) - US department store giant JC Penney took a major step on the road to recovery on Wednesday, pricing a bigger-than-expected US$400m unsecured bond that showed it has ample access to the debt capital markets.
The upsized deal, its first in four years, was multiple times oversubscribed - no mean feat for a troubled company that was only saved from default last May by a US$2.25bn real estate loan.
The five-year non-call life bond priced at par to yield 8.125%, which was at the tight end of whispers, heard from investors at 8%-8.5%.
Not only was the trade grown in size from US$350m, but timing was also accelerated because of the strong reception from investors.
"This deal was all about proving the company has access to the unsecured bond market, which it has done," said one banker close to the trade.
"They could have priced a much bigger deal based on the level of demand, but the company decided not to do any more than US$400m as it has a ton of liquidity."
Wednesday's transaction wasn't make-or-break for JC Penney, which had enough cash to repay its outstandings.
According to Moody's, the retailer had US$847m in available cash in August 2014, as well as a US$1.85bn asset-based credit facility.
A Fitch report noted trough liquidity, between cash on hand with JC Penney and availability on a revolver, in late October to mid-November is expected to be around US$1.3bn to US$1.4bn with year-end total liquidity of approximately US$2bn to US$2.1bn.
The latest deal will be used to tender for three outstanding bonds maturing in the next three years: US$200m 6.875% notes due October 2015, US$200m 7.675% notes due August 2016, and US$285m 7.95% notes due April 2017.
Analysts expect the company to take out the entire 2015 bond.
Moody's, which assigned a Caa2 rating to the new issue, said it may upgrade the company's outlook to stable from negative if it raised enough money to buy back the 2015 bonds in entirety.
The company's rehabilitation began last May when lenders granted a US$2.25bn loan to the company - a lifeline which staved off a liquidity crisis.
Goldman Sachs was lead arranger on the loan, which was backed by more than US$4bn of hard collateral, including an appraised value of over US$3.3bn in real estate collateral.
The company then tapped the equity market to raise cash, and in June this year arranged a new US$2.35bn five-year asset-based revolver.
Penney's business now also seems to be recovering.
It reported stronger-than-expected quarterly same-store sales last month, even as other big retailers like Walmart and Macy's had disappointing sales figures. Fitch downgraded Sears Holdings to CC from CCC on Wednesday, citing its decline in profitability and lack of visibility in the turnaround in its operations.
One banker said improvement in gross margins, which shows the company is tackling its inventories, was one of the metrics investors were most focused on.
One investor, who had kept an open mind on the issue but decided to hold off, said the new bonds were attractively priced to the outstanding curve.
The 5.75% February 2018 bonds, for example, are trading at a cash price of 97.3 with a yield-to-worst of 6.66%, CreditSights said.
"There are a lot of people who think that JC Penney has turned the corner, but we still have a few concerns about the company," said one investor. "We want to see how it does over the holiday season."
Moody's expects the interest coverage ratio to be -0.5 times earnings this year and to break even next year if the improvement in earnings continues.
"Although JC Penney sales and gross margins have notably improved in 2014, its profitability and credit metrics remain very weak," Moody's said.
"Further improvement in earnings is required for JC Penney to have a sustainable capital structure."
JP Morgan was left-lead on the new trade, while Barclays and Goldman Sachs were also bookrunners. (Reporting by Natalie Harrison; Editing by Shankar Ramakrishnan and Marc Carnegie)