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Fitch downgrades J.C. Penney to CCC+

Fitch Ratings on Sept. 18 downgraded J. C. Penney Co. Inc.'s long-term issuer default rating to CCC+ from B-, reflecting continued market share losses and declining EBITDA.

The agency said there is a lack of a visible material turnaround for the troubled department store chain, but noted that there are no near-term liquidity concerns. It said that although the current EBITDA run rate makes the capital structure unsound, near-term liquidity remains enough to sustain seasonal working capital, pay down moderate near-term debt maturities and absorb cash flow deficiencies.

The agency expects J.C. Penney's EBITDA to remain below $500 million over the next 12 to 36 months, with low-to-mid $400 million forecast in 2019 and 2020. It also forecasts adjusted debt/EBITDAR levels to trend at 9x in 2019 and 2020, compared to 7.4x in 2018 and the mid-5x in 2016 and 2017.

In addition, Fitch expects annual free cash flow to be negative $100 million to $200 million in 2019 and 2020, and liquidity to come in at around $1.5 billion by the end of 2019 and close to $1.2 billion at the end of 2020.

Fitch also expects a material decline in comparable store sales by as much as 8% this year, partly due to the departure of appliances and in-store furniture categories. The rating agency said the company's comparable store sales will likely dip in the negative low single digit range in 2020 due to continued weakness in key categories as well as declining store traffic brought by shifts to online and discount channels.

Fitch noted while J.C. Penney's long-term strategy remains uncertain considering recent senior leadership changes, it has been focusing on adding key positions to its management team, exiting low gross margin businesses like appliances and in-store furniture, and reducing inventory to improve gross margins.

Fitch said a positive rating action for J.C. Penney could occur if comparable store sales stabilize and EBITDA is sustained to more than $700 million annually. Meanwhile, it said a further downgrade is possible if comparable store sales continue to fall and result in a materially negative free cash flow.