Buy CDS on J.C. Penney debt, says Goldman

By Sue Chang and Saumya Vaishampayan, MarketWatch

SAN FRANCISCO (MarketWatch) — Goldman Sachs recommended buying credit-default swaps on several of J.C. Penney Co.’s outstanding debt just before the stock dropped to more than 12-year lows on Wednesday, hit by reports that the retailer is shopping for additional cash.

Decliners

J.C. Penney JCP +8.10%  slumped 15%, trading at levels not seen in more than 12 years. On Tuesday, Goldman Sachs recommended buying 5-year CDS, commonly used as insurance against possible delinquency, on J.C. Penney debt. “Although we are comfortable with the collateral value at the top part of the structure, in our view, the company’s term loan could experience downside if the company were to tap the debt markets for incremental liquidity,” said Kristen McDuffy at Goldman Sachs in a report. She also initiated coverage of three tranches of J.C. Penney’s debt maturing in 2017, 2020 and 2036 at underperform.

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J.C. Penney falls to 12-year low.

CDS spreads on J.C. Penney widened 154 basis points to 1195 basis points, according to Markit Wednesday.

On Monday, Michael Binetti at UBS said fresh funds could help to stabilize J.C. Penney’s liquidity position, but concerns remain over the slow recovery of the department store’s key metrics, including same-store sales, gross margins and cash flow.

“In our view, another potential capital raise suggests that JCP is still struggling to win back its wayward consumer—and could signal that 3Q traffic & [same-store sales] trends have not improved much despite a return to traditional merchandise & heavy couponing,” he said.

J.C. Penney is talking to banks and institutional investors to secure more capital in the form of both debt and equity, according to Reuters last week.

The stock has been in a steady decline since Sept. 10 except for a brief rebound on Sept. 17. So far this year, the struggling retailer’s shares have shed about half of their value. 

Baxter International Inc. BAX +0.06%  slid 6.4%. Last week, the drug and medical-device maker said it is recalling two lots of Dual Luer Lock Caps due to the presence of “loose particulate matter” in the packaging. The caps are used to protect access ports on medical devices when not in use, Baxter said.

Carnival Corp. CCL -0.03%  shares fell 5.3%. The cruise-line operator faced a wave of analyst action, with a downgrade from Morgan Stanley and price-target cuts from J.P. Morgan and Susquehanna, a day after the company forecast lower-than-expected fiscal fourth-quarter earnings.

Gainers

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First Solar Inc. FSLR +0.15%  shares added 3.5%. Short interest in First Solar fell to 10.78 million shares as of Sept. 13. The most recent position represents 15.3% of the company’s float, said financial news website 24/7 Wall St.

Seagate Technology PLC STX -1.55%  shares added 5% although it was not immediately clear what sparked the rally. The stock is up about 44% year-to-date.

Genworth Financial Inc. GNW +2.67%  shares gained 3.9%. The insurer said Tuesday that it will request premium increases for certain Privileged Choice and Classic Select policies.

Gannett Co. GCI -1.09% shares rose 3.6%. Belo Corp.’s BLC +0.02% shareholders on Wednesday approved the $2.2 billion merger with Gannett.

Mako MAKO -0.03%  shares soared 82% on news that the medical-device maker will be bought by Stryker SYK -0.96%  in a $1.65 billion deal. Shares of Stryker fell 2.9%.

Trending Tickers

$FB: Facebook Inc. FB +2.04%  advanced 2.1%. The social network reached an all-time closing high on Tuesday of $48.45. Facebook was initiated at a buy rating and a price target of $60 by Canaccord Genuity. The stock was upgraded to a buy rating from neutral by Citigroup, which also increased its price target to $55 from $32.

$AZO: AutoZone Inc. AZO -0.90% said Wednesday its fiscal fourth-quarter profit rose to $371.2 million, or $10.42 a share, from $323.7 million, or $8.46 a share, in the year-ago period. Adjusted earnings were $9.76 a share and net sales rose to $3.1 billion. Analysts expected earnings of $10.34 a share, according to a survey by Thomson Reuters. AutoZone shares gained 2.6%.

$NE: Shares of Noble Corp. NE -0.59%  climbed 1.8%. The company said Tuesday it received authorization from its board of directors to split into two offshore-drilling companies.

Sue Chang is a MarketWatch editor in San Francisco. You can follow her on Twitter at @SueChangMW. Saumya Vaishampayan is a MarketWatch reporter based in New York. You can find her on Twitter @saumvaish.