J.C. Penney: Consensus On Cap Structure Shifting?

| About: J.C. Penney (JCP)


The price of the two-year credit default swap has dropped by half in the last month.

The CDS are no longer priced for near-term default.

The Company's capital structure is re-pricing for long-term solvency.

As reported by Bloomberg this morning, the cost of protecting against default by JCP within two years has dropped below the price of five-year protection by the most it has in a year. As recently as April, the relationship was inverted, meaning the cost of short-term protection was higher than long-term protection (typically, the further out in time, the more expensive the insurance against default).

Two-year credit default swaps (CDS) traded yesterday at 634 basis points, vs. 1,290 BPS on April 30th.

Like the price of the shares, the CDS price is ultimately only the culmination of the market's opinion. As financial shorthand for risk, it says nothing specific about the underlying operations of the Company.

However, with the price of insuring against default decreasing so dramatically, it would seem inarguable that the skepticism of the Company's prospects has declined substantially as well.

Based on where the CDS are trading, that re-pricing appears to be gathering momentum. They're certainly not out of the woods yet (note S&P's recent CCC+ rating). And given management's credibility deficit, it will probably take several more quarters of reassuring performance to remove the spectre of insolvency. But investors up and down the cap structure would seem to agree that the prospect of bankruptcy is fading.

Disclosure: I am long JCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.