Although J.C. Penney (NYSE:JCP) got another vote of confidence from its banker friends who extended it more credit at lower interest rates (suggesting they believe they'll have little trouble getting repaid), investors apparently aren't too keen on heaping on greater amounts of debt at a time when it's still grappling for a footing, and have sent its stock lower.

Cheaper debt's fine and all, but when you're burning through cash as the retailer is, a big mountain of bills to pay is still a dangerous situation to be in.

On Monday the department store said it closed on a new $2.35 billion asset-based senior secured credit line that lowers its borrowing costs. The new agreement, which replaces its prior $1.85 billion credit line that was due to mature in less than two years, will be replaced with a similarly valued revolving line of credit along with a $500 million term loan. 

Using financing to pay for its day-to-day operations and fund an anticipated recovery, J.C. Penney has borrowed approximately $3.1 billion from its credit line since CEO Myron Ullman resumed the retailer's helm following its near collapse in the wake of strategy changes by former CEO Ron Johnson. It also raised some $785 million in cash from an equity offering last fall. While analysts and investors were worried about what that meant for the department store operator's financial situation, Penney's prospects have somewhat improved since then, though it's still nowhere near out of the woods. 

Last quarter it reported net sales of $2.80 billion, up 6% from the $2.64 billion it generated the year before as same-store sales surged 6.2%. Gross margins improved while operating income, though still at a loss of $247 million, was a 49% improvement over last year. Going forward, it expects comps to continue growing at a mid-single-digit rate, with margins increasing and free cash flow coming in at breakeven.

Penney will use the proceeds from the new term loan to pay down its previous cash borrowings from the previous credit facility and extend the maturity date on the new credit facility, but that's sort of like a homeowner refinancing his mortgage to pay off his credit cards. As much as I believe J.C. Penney has changed course for the better overall, it is troubling that the company found it necessary to dig a deeper hole to find firmer footing.

A lot of the gains it's made have come as a result of offering big, doorbuster sales and shedding slow-moving inventory at big discounts. Customers may like those promotions, and it is helping traffic, but it continues to hurt margins at a time when iJ.C. Penney needs to be generating cash. The fear is that when it returns to normalcy, the traffic gains it's made will slow again, plunging the retailer into financial peril once more at a time when it's got bigger bills to pay.

Thus far J.C. Penney has done what's necessary to regain the trust of its customers, suppliers, and apparently, its creditors. Let's just hope the hole it finds itself in isn't too deep to climb out of.

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