(Reuters) - J.C. Penney Co Inc (JCP.N) has borrowed $850 million from its $1.85 billion revolving credit facility to help buy inventory as the department store operator revamps its business strategy after a failed turnaround.
The company said on Monday it will use the proceeds to fund its working capital needs and capital expenditures, including buying inventory as it overhauls its home goods department, an effort it expects to complete next month.
The borrowing, which analysts said was bigger and sooner than expected, was seen as merely a "stop-gap measure" by Fitch Ratings, who said it remains concerned about Penney's ability to secure the roughly $1 billion it will need in permanent financing this year.
"We expect J.C. Penney will need to tap into various sources of funding including equity infusion," the agency said on Monday, a week after Penney ousted Chief Executive Ron Johnson, who was brought in by shareholder and board member William Ackman to revitalize the lackluster retailer.
But the fact that the retailer had to draw on its credit line shows that so far, there is "no potential equity investor ready with a checkbook," said Gimme Credit analyst Carol Levenson.
"It's good that the company has the flexibility to do this," Levenson said, "but it also demonstrates that the 'internally financed transformation' envisioned by previous management was a pipe dream."
Standard & Poor's Ratings Services said the move had no immediate effect on the company's ratings or outlook.
"Our assessment of the company's liquidity remains 'less than adequate,'" the agency said. "If the company were to increase its total secured debt beyond the revolver, this could have a negative effect on the issue-level rating on the unsecured debt."
The cost of buying credit protection in J.C. Penney went up dramatically on Monday, with buyers of five-year J.C. Penney credit default swaps paying $1.53 million plus $500,000 to insure $10 million in debt, up from Friday's cost of $1.38 million.
The company's shares fell 23 cents, or 1.6 percent, to close at $14.39 on the New York Stock Exchange.
The borrowing is subject to an interest rate of 5.25 percent and matures in April 2014.
Chief Financial Officer Ken Hannah said the draw provided more current funding than needed to ensure liquidity and that Penney would continue to explore additional capital-raising options with its financial advisers.
"As Penney looks at its cash position and sources of cash, the real estate is going to play an important role," said Cedrik Lachance, managing director at Green Street Advisors, noting that Penney could get loans secured by its stores. "That's highly likely. I would not be surprised though if we see some stores being sold."
A company spokesman declined to elaborate on the drawdown, but said the Plano, Texas-based company had no plans to cut jobs or close stores due to its recent performance.
All vendor invoices have been paid on time and as scheduled, he said.
J.C. Penney, which competes with Kohl's Corp (KSS.N) and Macy's (M.N), is also likely gearing up to make purchase order commitments for the 2013 holiday shopping season, since it typically takes months for manufacture and delivery.
Loblaw Cos Ltd (L.TO), owner of the Joe Fresh brand that recently debuted shops inside J.C. Penney stores, said on Monday that its performance there has been better than expected.
"We are looking forward to continuing our strong working relationship with all levels at J.C. Penney and CEO Mike Ullman," said a Loblaw spokeswoman. "It's fair to say that it's status quo from our perspective."
But Harmit Singh, CEO of supplier Levi Strauss & Co LEVST.UL, said on April 9 that the company had been "keeping a close eye on the receivable situation."
The company is working with the advisory arm of Blackstone Group LP (BX.N), sources told Reuters last week, adding that J.C. Penney had been in contact with several private equity firms about a possible investment.
CFO Hannah said in February that the company increased its line of credit to $1.85 billion from $1.5 billion and expanded the accordion feature to $400 million from $250 million. It also increased the number of lenders.
Coupled with cash on hand, the amendments gave J.C. Penney access to short-term capital of about $3 billion, Hannah said at the time.
When the facility was amended, the company said it had not drawn any funds. In March, Hannah said he was not opposed to using it for working capital needs.
In drawing the funds, J.C. Penney is taking advantage of the money while it remained available, since banks could reduce the next credit line, said Harlan Platt, a finance professor at Northeastern University.
"If they had not drawn down the money, it would have come down on its own; they would have lost the availability," Platt said. "You always want to stock up while it's there."
The $850 million draw is much bigger than the $100 million BMO Capital Markets analyst Wayne Hood was expecting for the first quarter.
Hood took the news as a sign of potentially weaker-than-expected first-quarter sales and a deteriorating outlook for forward cash flow.
The company is hosting an annual meeting on May 17 and often reports earnings right before such meetings.
J.C. Penney brought in Johnson as CEO in November 2011, after major shareholder and board member William Ackman picked the Apple Inc (AAPL.O) guru to lead a turnaround.
Sales slid in 2012 as Johnson's dramatic changes alienated core customers without bringing in new ones.
Last week, Johnson was replaced with his predecessor, Myron Ullman, who is bringing back the old pricing strategy that relied heavily on coupons to draw in shoppers.
Additional reporting by Jessica Wohl in Chicago; Lisa Baertlein in Los Angeles; Ilaina Jonas, Melissa Mott and Jonathan Stempel in New York; Editing by Gerald E. McCormick, Lisa Von Ahn and Richard Chang