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JC Penney bonds, CDS tighten after co. shows October sales increase

J.C. Penney debt and shares edged higher, just as the cost of default protection contracted, after the struggling retailer updated investors on its continued turnaround progress, showing a gain in store sales for the first time in years. JCP shares traded up roughly 4%, to $8.03, while its 5.65% notes due 2020 edged up half a point, to a 77 mid-market, according to sources.

Five-year CDS on J.C. Penney contracted 4% this morning, to 25.625/26.625 points upfront, according to Markit. While still indicating deep distress at those levels, take note it’s tighter by 13% as compared to the record wide, at 31.5 points upfront late last month, or essentially $537,500 cheaper, at approximately $2.6 million upfront, in addition to the $500,000 annual payment, to protect $10 million of J.C. Penney bonds.

J.C. Penney reported that same store sales increased 0.9% in October, marking the first positive reading since December 2011, and online sales at jcp.com increased 37.6 % versus the year-ago period, according to a company statement. Management cited “favorable customer response” to promotional events and improved inventory levels, the filing shows.

The issuer’s various other corporate bond issues notched modest gains, as well. Examples include the 7.65% notes due 2016, which edged up half a point, to 83.5/84.5, and the “century bonds” – the 7.625% bonds due 2097 – which added one point, to 68/70, according to sources.

Recall that Fitch Ratings on Oct. 2 downgraded J.C. Penney and its senior notes to CCC, from B-, due to a projected free-cash-flow shortfall in 2014 and the resulting need for additional external funding, even with a $3 billion-plus liquidity injection this year. The downgrade follows S&P and Moody’s last spring, putting the current profile on the retailer’s various senior notes at CCC-/Caa2/CCC. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, and trading news