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* Fitch calls this a "stop-gap measure"
* Move is part of home goods dept revamp
* Exploring capital-raising options with advisors
* No impact on ratings, outlook-S&P
* Stock ends slightly lower
By Martinne Geller
April 15 (Reuters) - J.C. Penney Co Inc has borrowed$850 million from its $1.85 billion revolving credit facility tohelp buy inventory as the department store operator revamps itsbusiness strategy after a failed turnaround.
The company said on Monday it will use the proceeds to fundits working capital needs and capital expenditures, includingbuying inventory as it overhauls its home goods department, aneffort it expects to complete next month.
The borrowing, which analysts said was bigger and soonerthan expected, was seen as merely a "stop-gap measure" by FitchRatings, who said it remains concerned about Penney's ability tosecure the roughly $1 billion it will need in permanentfinancing this year.
"We expect J.C. Penney will need to tap into various sourcesof funding including equity infusion," the agency said onMonday, a week after Penney ousted Chief Executive Ron Johnson,who was brought in by shareholder and board member WilliamAckman to revitalize the lackluster retailer.
But the fact that the retailer had to draw on its creditline shows that so far, there is "no potential equity investorready with a checkbook," said Gimme Credit analyst CarolLevenson.
"It's good that the company has the flexibility to do this,"Levenson said, "but it also demonstrates that the 'internallyfinanced transformation' envisioned by previous management was apipe dream."
Standard & Poor's Ratings Services said the move had noimmediate effect on the company's ratings or outlook.
"Our assessment of the company's liquidity remains 'lessthan adequate,'" the agency said. "If the company were toincrease its total secured debt beyond the revolver, this couldhave a negative effect on the issue-level rating on theunsecured debt."
The cost of buying credit protection in J.C. Penney went updramatically on Monday, with buyers of five-year J.C. Penneycredit default swaps paying $1.53 million plus $500,000 toinsure $10 million in debt, up from Friday's cost of $1.38million.
The company's shares fell 23 cents, or 1.6 percent, to closeat $14.39 on the New York Stock Exchange.
MORE THAN NEEDED
The borrowing is subject to an interest rate of 5.25 percentand matures in April 2014.
Chief Financial Officer Ken Hannah said the draw providedmore current funding than needed to ensure liquidity and thatPenney would continue to explore additional capital-raisingoptions with its financial advisers.
"As Penney looks at its cash position and sources of cash,the real estate is going to play an important role," said CedrikLachance, managing director at Green Street Advisors, notingthat Penney could get loans secured by its stores. "That'shighly likely. I would not be surprised though if we see somestores being sold."
A company spokesman declined to elaborate on the drawdown,but said the Plano, Texas-based company had no plans to cut jobsor close stores due to its recent performance.
All vendor invoices have been paid on time and as scheduled,he said.
J.C. Penney, which competes with Kohl's Corp andMacy's, is also likely gearing up to make purchase ordercommitments for the 2013 holiday shopping season, since ittypically takes months for manufacture and delivery.
Loblaw Cos Ltd, owner of the Joe Fresh brand thatrecently debuted shops inside J.C. Penney stores, said on Mondaythat its performance there has been better than expected.
"We are looking forward to continuing our strong workingrelationship with all levels at J.C. Penney and CEO MikeUllman," said a Loblaw spokeswoman. "It's fair to say that it'sstatus quo from our perspective."
But Harmit Singh, CEO of supplier Levi Strauss & Co, said on April 9 that the company had been "keeping aclose eye on the receivable situation."
STOCKING UP WHILE IT'S THERE
The company is working with the advisory arm of BlackstoneGroup LP, sources told Reuters last week, adding thatJ.C. Penney had been in contact with several private equityfirms about a possible investment.
CFO Hannah said in February that the company increased itsline of credit to $1.85 billion from $1.5 billion and expandedthe accordion feature to $400 million from $250 million. It alsoincreased the number of lenders.
Coupled with cash on hand, the amendments gave J.C. Penneyaccess to short-term capital of about $3 billion, Hannah said atthe time.
The loans were arranged by JP Morgan Securities LLC,Bank of America Merrill Lynch, Barclays Capital and Wells Fargo Capital Finance.
When the facility was amended, the company said it had notdrawn any funds. In March, Hannah said he was not opposed tousing it for working capital needs.
In drawing the funds, J.C. Penney is taking advantage of themoney while it remained available, since banks could reduce thenext credit line, said Harlan Platt, a finance professor atNortheastern University.
"If they had not drawn down the money, it would have comedown on its own; they would have lost the availability," Plattsaid. "You always want to stock up while it's there."
The $850 million draw is much bigger than the $100 millionBMO Capital Markets analyst Wayne Hood was expecting for thefirst quarter.
Hood took the news as a sign of potentiallyweaker-than-expected first-quarter sales and a deterioratingoutlook for forward cash flow.
The company is hosting an annual meeting on May 17 and oftenreports earnings right before such meetings.
J.C. Penney brought in Johnson as CEO in November 2011,after major shareholder and board member William Ackman pickedthe Apple Inc guru to lead a turnaround.
Sales slid in 2012 as Johnson's dramatic changes alienatedcore customers without bringing in new ones.
Last week, Johnson was replaced with his predecessor, MyronUllman, who is bringing back the old pricing strategy thatrelied heavily on coupons to draw in shoppers.
