| NEW YORK
NEW YORK Feb 5 Pricing on JC Penney's
unsecured bonds and credit default swaps today remain relatively
unchanged after the company filed disclosures regarding a
potential bond default.
At issue is whether the pledging inventory as collateral to
the company's $1.75 billion asset-backed credit facility
violates a bond indenture written in 1994. A default, if found
true, could be addressed in 90 days but would add another
headache to the company's attempts to turn around its struggling
Dealers are quoting JC Penney's 7.4 percent unsecured bonds
due 2037 at 85 this morning, down about a quarter point from
yesterday and a point from a week ago. Meanwhile, the company's
credit default swaps tightened, which tends to signal a lower
risk of default, this morning to 18.5 points upfront from 20.5
This means investors would need to pay $1.85 million upfront
and $500,000 annually to protect $10 million of unsecured debt
from default for five years.
Holders of the unsecured bonds due 2037, represented by
Brown Rudnick LLP, believe that granting inventory liens violate
a covenant that prohibits such a pledge unless unsecured bonds
receive the same.
"The merits of the bondholder argument depends on whether
inventories fall under the scope of the Principal Property
definition", said Adam Cohen, founder of Covenant Review, an
independent credit research firm. "Even if it does, JC Penney
can argue that inventory is being pledged to secure debt that
finances the acquisition of that inventory, which should be
allowed under the bond indentures."
The principal property definition includes all "real
property and tangible personal property" attached to certain
types of company buildings. One could argue that the transient
nature of retail merchandise at JC Penney means that inventories
would not qualify as being part of such buildings.
The indenture further includes a material threshold of 0.25
percent of shareholders' equity for qualifying inventory. JC
Penney reported shareholders' equity of $3.5 billion at the end
of last October.
In addition, the company has disclosed the credit line
remains undrawn, so not actual debt outstanding has a claim on
the pledged inventories.
JC Penney has filed a complaint in the Delaware Courts
seeking a judgement declaring that the company has done nothing
Market analysts seem to have shrugged off the severity of
the bondholders allegations for now. One sell-side analyst wrote
in a note to clients, "We do not believe the intent of the
definition was to include inventory but instead related to real
property and believe the definition reads as such.... We believe
if JCP loses, it could be forced to renegotiate its credit
agreement and/or collateralize more of its assets."
Calls to Brown Rudnick were not returned by press time.