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S&P downgrades Penney to junk bond

Citing a weak first quarter and continued downward pressure on profits, Standard & Poor's, one of the big three corporate credit rating agencies, knocked J.C. Penney down a notch to "junk bond" status.

S&P took the retailer's bank loan rating to "BB+" from "BBB-". About $5.2 billion in debt is involved. The outlook, S&P continued, is "negative."

Gerald Hirschberg, S&P rating analyst, said the downgrade reflects disappointing results for the first quarter of fiscal 2003 and S&P's "expectation that results for the remainder of the year will continue under pressure."

Hirschberg said, "We continue to believe that management's plan to improve merchandising and marketing and to centralize distribution for department stores will succeed and that Eckerd has the foundation to perform more profitably in the future. But, the time horizon for success has been lengthened because of the extremely competitive retail environment and very difficult economic conditions."

With the outlook for retailing increasingly clouded, "The presumed steady improvement in earnings and in credit ratios that had been the key factor in maintaining the previous rating is now likely to be much more difficult to achieve. Credit ratios are more likely to remain at 2002 levels, which are not characteristic of investment grade," said Hirschberg.

The analyst also had mixed feelings about the retailer's stepped-up capital spending plans. "While this is very necessary, and should help to make Eckerd a more competitive entry in the drugstore business, it will detract from the company's financial flexibility during the next year or two."

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