OREANDA-NEWS. S&P Global Ratings raised its corporate credit rating on the York, Pa.-based The Bon-Ton Stores Inc. to 'CCC+' from 'CCC'. The outlook remains negative.

At the same time, we raised the issue-level rating on the company's second-lien senior secured notes to 'CCC' from 'CCC-', commensurate with the corporate credit rating. The '5' recovery rating remains unchanged, indicative of our expectation for modest recovery toward the lower end of the 10% to 30% range in the event of a payment default or bankruptcy.

"The upgrade reflects our view of Bon-Ton's somewhat improved liquidity after refinancing its A-1 ABL term loan tranche with an extended maturity to March 2021 and enhanced liquidity from the additional $50 million in borrowing capacity to address upcoming debt maturity in 2017. We expect the negative secular competitive trends to persist in the remainder of 2016 and in 2017, and that the company will continue to generate meaningful negative free operating cash flow," said credit analyst Mathew Christy. "However, we believe the recent refinancing of the company's ABL term loan facility somewhat improved the company's liquidity for the next 12 months and provides the ability to pay down the $57 million of second-lien notes maturing in 2017."

The negative outlook reflects our expectation that weak operating performance will result in meaningful negative free operating cash flow in fiscal 2016, that could hurt the company's liquidity and increase refinancing risk for the 2018 debt maturities.

We could lower the ratings if the company's liquidity conditions deteriorate and we envision a specific default scenario occurring over the next 12 months. This could arise if the company's liquidity deteriorates such that it increases reliance on its revolver to about $550 million or more on a sustained basis, leading to a potential that the fixed charge covenant is triggered and lead us to believe the company could no longer service its interest obligations going forward. We would also consider a lower rating if the company has not made meaningful progress in refinancing or extending the maturity in 2017 to address the maturity of the ABL in 2018, leading the company to seek a restructuring of its capital structure.

A higher rating is unlikely in the next 12 months given the declining operating performance trends, an unsustainable capital structure, and our view that the company does not generate sufficient cash flows to support its operations, interest burden, and refinancing needs. A positive rating action would be predicated on a significant turnaround in operating performance, leading to a significant improvement in the company's cash flow generation and liquidity position.