Insight: JCPenney's 100-year bonds swoon amid retailer's turmoil

Wed Aug 14, 2013 1:03am EDT
 
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By Dan Burns

(Reuters) - It was a "century" deal, but in hindsight it was hardly the deal of the century.

More than 17 years and a dozen credit downgrades ago, JCPenney Co Inc. (JCP.N: Quote) joined an elite club in capital markets circles by issuing a rare 100-year bond.

The deal from Penney, then sporting a mid-range investment-grade rating of "A" from Standard & Poor's and coming off record holiday-season sales, matched the year's largest "century bond" deals at $500 million, but the company stood out as the only retailer in the mix.

By all accounts the sale of the 7-3/8 percent notes due 2097, managed by Credit Suisse, JP Morgan, Morgan Stanley and Merrill Lynch, went smoothly. The future seemed bright: Penney was riding high on investor optimism about its $3.3 billion purchase of the Eckerd drug store chain months earlier and within 18 months its stock would be at then record highs.

But 100 years makes for one long bet, particularly on a player in a sector as flighty as mass-market retailing, and it's been anything but smooth sailing since.

Like the stock, Penney's bonds, long since fallen deep into junk status with a CCC- rating, have taken it on the chin as the store group's sales have plunged amid a disastrous pricing and marketing strategy and failed attempt to appeal to the more affluent shopper. Its recent related tussle with activist hedge fund investor Bill Ackman, and uncertainty about the status of its vendor financing deals, have further undermined investor confidence.

It is now facing a very uncertain holiday season with a temporary CEO at the helm following its firing of Ron Johnson, the former Apple executive who was largely seen as the architect of its failed strategy.

The 2097 bonds have fallen 21 percent in price since mid-May, and are currently trading at 67 cents on the dollar, near their lowest since the financial crisis. They offer a yield of 11.38 percent. By contrast, the average effective yield on bonds in the Bank of America Merrill Lynch CCC and Lower U.S. High Yield Index, an index of lower-rated junk bonds, is 9.77 percent.   Continued...

 
The sign at the entrance of a J.C. Penney store is pictured in Arcadia, California March 1, 2013. REUTERS/Mario Anzuoni