UPDATE: April 15, 2020: J.C. Penney is considering a possible bankruptcy filing to rework "unsustainable finances" and get relief on debt payments, according to a Reuters report that cited unnamed sources familiar with the matter. Although the company has enough cash to survive in the short term, Reuters reports that Penney is concerned about prolonged closures and depressed customer traffic. The company is also talking with lenders about a possible out-of-court deal on its debt, according to the report. J.C. Penney did not immediately respond to Retail Dive's request for comment. 

Dive Brief:

• Moody's downgraded J.C. Penney's credit rating deeper into junk territory, to Caa3, and changed its outlook to negative, according to a Monday press release.
• "Although J.C Penney liquidity is adequate, the widespread store closures as a result of the coronavirus pandemic and the continued suppression of consumer demand is expected to pressure ... EBITDA, impede its turnaround strategy and weaken its leverage to unsustainably high levels," Moody's Vice President Christina Boni said in the release.
• Also on Monday, Bloomberg reported that the retailer added consulting firm AlixPartners to its stable of advisers. The news service also reported that Penney has been talking with banks about its liquidity needs and has engaged in "on-and-off negotiations with lenders about a possible debt deal." A spokesperson for the retailer declined to comment on the Bloomberg report or Moody's downgrade.

Dive Insight:

J.C. Penney is among the retailers that started out the year in distress, with falling sales, even while the economy overall was in good shape. Now the spread of COVID-19, and the efforts to slow it, have thrown the economy and retail itself into turmoil, and distressed retailers face even deeper challenges. 

J.C. Penney last month joined the more than 100 retailers closing their stores or reducing hours as part of the broader mitigation effort. To shore up its liquidity — of central importance for retailers during the closures —​ the department store chain has furloughed store and corporate staff, drawn from its credit facility, put off capital spending, frozen hiring, cut costs, reduced receipts and extended vendor payments. 

These are all dramatic moves, during what was supposed to be a year that the retailer focused on reinvigorating its stores and merchandising. Now it is hunkered down and using all its available resources simply to stay afloat. 

As the pandemic weighs on consumer demand, Moody's estimates that J.C. Penney's EBITDA could decline more than 80% in fiscal 2020 before recovering, slowly, in 2021. Analysts with the ratings agency think it could be "well into 2022" before Penney hits its 2019 $600 million EBITDA figure again. 

"As a result, J.C. Penney's leverage will remain at unsustainably high levels over the next two years," Moody's analysts said. "In addition, the company's work to define and execute its strategy to return to stabilizing its market position and improving profitability will be difficult in the current operating environment." 

Penney is not alone in its struggles. Its sector, already bruised, could be thrown into deeper troubles. Department stores as a group have a 42.1% median probability of defaulting on their debt within a year, according to emailed research from S&P Global Market Intelligence. As a sector, department stores lead all other consumer industries in default risk. 

According to analysts with Cowen & Co., the department store sector has about five to eight months of liquidity to weather the closures before cash starts to run out.