Penney stock falls on worries on bondholder claims

NEW YORK (AP) -- J.C. Penney Co.'s shares fell Tuesday, a day after the struggling department store chain filed a lawsuit in Delaware court to stop a group of bondholders from declaring that the merchant is in violation of a bond agreement. Investors are worried that any accelerated debt payments could put more financial stress on the company.

THE SPARK: Penney said late Monday that it received a letter last week from law firm Brown Rudnick LLP, which represents more than half of holders of the company's 7. 4 percent bonds that are due in 2037.

The law firm contends that the department store chain violated an inventory-secured credit agreement in January 2012 without providing security for the bondholders, according to a statement from Penney.

"We believe this notice of default is invalid, completely without merit and is intended to create self-interested trading opportunities in the market, and we will therefore vigorously defend the interests of J.C. Penney and all of our constituencies in all appropriate forums," Ken Hannah, Penney's chief financial officer, said in a statement.

J.C. Penney says it has publicly disclosed for 10 years that it has had various undrawn credit facilities secured by inventory with no bondholder allegations of violation of the agreements.

According to the filing by Penney in the Chancery Court of Delaware, the bondholders are threatening to make Penney repay the $326 million owed unless it takes steps to fix the alleged violations in the agreement within 90 days.

James Stoll, partner at Brown Rudnick, couldn't be immediately reached for comment.

THE BIG PICTURE: The latest development comes at a difficult time for Penney, which is undergoing a major transformation in every aspect of its business, from pricing to merchandise, under CEO Ron Johnson.

The Plano, Texas-based company has seen mounting losses and steep sales drops since it began a new price strategy about a year ago that focused on everyday low prices and eliminated most sales and all coupons.

Penney is depending on a campaign to bring in new brands and carve its stores into 100 shops by the end of 2015. The worry has been that Penney won't be able to stem the bleeding of sales quickly enough to finance its transformation of its shops. If Penney has to make accelerated payments on debt, that would add more financial duress.

Any notice of default would cause Penney "irreparable harm, including but not limited to increased borrowing costs and the inability to effectively deploy capital to support its strategic business plan," according to the filing by Penney.

SHARE ACTION: Shares fell 2.5 percent, or 48 cents, to $18.86. Investors have sent shares down more than 55 percent from a peak of $43 in the days after the pricing plan was rolled out in February 2012.