J.C. Penney’s unexpected decision to raise capital sparked some concern among investors in commercial mortgage backed securities, as the retailer is the second largest tenant in this market, according to J.P. Morgan.
J.C. Penney said last week that it would sell 84 million shares of common stock to raise $800 million for general corporate purposes. J.P. Morgan analysts believe the capital raise is targeted to shore up the company’s balance sheet for the holiday sales season and ease vendor concerns about the company’s liquidity. They noted that the company’s stock hit 52-week lows of $9.05, while its five-year CDS reached a new high of 20 points upfront.
Opinions diverge on how a J.C. Penney bankruptcy or strategic store closings will impact CMBS credit and spreads: J.P. Morgan’s view is that store closings are inevitable and that the company will benefit.
While a stronger J.C. Penney ultimately benefits CMBS investors with exposure to the company, the store closings may not. “We acknowledge that finding replacement tenants for some locations will be challenging, given large store sizes; candidates include retailers that often locate in lifestyle centers or strip malls (Target, Dick’s) or regional retailers, but many obvious candidates may already have a local presence,” the analysts wrote in a weekly report.
They believe that J.C. Penney deserves “close ongoing surveillance” as they are not out of the woods by any means. If anything, the analysts wrote, headline risks will grow as the holiday sales season approaches. Not that there is any way to reduce exposure to the retailer without reducing exposure to the broader CMBS market, since “it is nearly impossible to own or add CMBS and not have some indirect exposure to the company.”
CMBS spreads across the capital structure were little changed last week; benchmark legacy A4s ended Friday 1 basis point wider at swaps plus 159 basis points, while 10-year new issue triple-As were unchanged at swaps plus 93 basis points.