While we don't often discuss U.S. businesses here on the Great Wealth Strategies blog, the fact remains that many American companies both big and small are facing unprecedented challenges in the midst of a global economic slowdown. JCPenney, the retail giant, has been struggling to gain traction against its larger and more affordably priced competitors. Changes in leadership and a veritable hammering of its stock have left the business with few options, although it's possible that the specter of bankruptcy is weighing on the mind of every shareholder.
According to the New York Post, rumors are circulating that senior management officials at JCPenney are seriously exploring the idea of a bankruptcy filing. While it's not clear what form this action would take, it's likely that any attempt to shed off some of its debt is going to be met by fierce opposition from its creditors. In fact, in late September, Goldman Sachs issued a warning to investors that buying credit-default swaps (CDS) might be a wise decision given the fiscal turbulence facing the company.
"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," the bank indicated in its report.
We will avoid embarking on a discussion of the merits of CDS, but suffice to say that there is a risk investors could lose more money on JCPenney's ill-guided growth strategy. This holiday season – typically retail's best time of year – will illustrate just how precious JCPenney's position is. In the mean time, investors should think about utilizing robotic trading software to help them act against potential risk upsides.