JC Penney CDS narrows after Ackman's departure
Aug 13 (IFR) - Credit default swaps (CDS) in JC Penney snapped tighter across all maturities on Tuesday after activist investor Bill Ackman resigned from the company's board following a bitter fight over the future of the troubled retailer.
The five-year maturity, typically the most actively transacted, tightened by 90bp to 1132bp, while the 10-year narrowed 40bp to 1151.5bp. One-year CDS narrowed over 100bp and the tenor briefly fell below par.
CDS are essentially protection against the default of an issuer's bonds. Tightening or narrowing means the market believes a default is somewhat less likely or has more confidence in the name.
JC Penney has seen its CDS blow out some 60% since mid-May, after then CEO Ron Johnson was pushed out following what many saw as a disastrous tenure in which he tried to radically restructure the retailer's corporate strategy and its image in the marketplace. Around that time, the company also released first-quarter results that fell short of consensus estimates.
Ackman stepped down from the board Monday after battling to oust interim CEO Myron Ullman, who took over following Johnson's departure, and Chairman Thomas Engibous.
In his place the board elected Ronald Tysoe, an industry insider with 16 years experience with Federated Department Stores.
Ackman's hedge fund Pershing Square Capital Management owns about an 18% stake in JC Penney.
"The crosscurrents are huge in [JC Penney] and there has been a confluence of noise, which has been a driver of sentiment," said Brian McGough, the head of retail sector research at Hedgeye Risk Management.
As of August 2, the DTCC net notional levels in JC Penney - essentially the total amount of protection written on the company's bonds - was USD1.67bn, up 13% since mid-May.
The widening in Penney's CDS since then has pushed its synthetic credit curves further into negative territory in both the short and intermediate term, reflecting the increase in risk premia.
But Ackman's departure has provided a reprieve in the heavily inverted 5s10s CDS curve, as its negativity was marginally lessened amid the tightening in CDS. Likewise, the shorter-term 3s5s steepened back to positive terrain on Tuesday thanks to the improved sentiment.