By Dan Burns
Aug 14 (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. 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.
Some big names in the bond business can be counted among the
casualties.
Loomis Sayles & Co. holds about $19.4 million of the bonds
as of June 30, according to Emaxx, a bond investor tracking
service owned by Thomson Reuters.
Dan Fuss, vice chairman and portfolio manager at Loomis,
said the firm, which has $190 billion in assets, is reassessing
its position.
“When you lose market share, it is difficult to stop the
bleeding, especially in retail,” Fuss said.
Back in 1997, the Penney deal came to market in what turned
out to be the banner year for “century bond” issuance.
Following on IBM’s record $850 million deal in
December 1996, ultra-long bond fever struck Wall Street and
corporate treasurers alike, and an unprecedented 26 investment
grade century bond sales totaling $7.12 billion hit the market
over the next 12 months, according to IFR Markets data.
Car makers Ford and Chrysler both sold $500 million,
as did Baby Bell operators BellSouth and US West. Railroads
Norfolk Southern and Burlington Northern Santa Fe
clocked in at $350 million and $200 million respectively, and
Boston University raised $100 million.
In all, IFR data shows 65 U.S. 100-year bonds with a face
value of $16.29 billion have been issued since Walt Disney
and Coca-Cola debuted century deals on successive
days in July 1993. Recent ultra-long issuance has been dominated
by high-rated universities, which account for six of the 10
deals since the financial crisis, led by Massachusetts Institute
of Technology’s $750 million deal in May 2011, largely on the
basis that they are more likely to be around in the next century
than many companies.
In fairness to Penney’s bonds, few of the century bonds have
fared well of late as the corporate bond market has been
whipsawed by investor anxiety over the future of the U.S.
Federal Reserve’s massive stimulus program.
High-grade bonds like IBM’s 2096s, rated AA-, have dropped
18 percent in price since early May. Even MIT’s AAA-rated notes
due 2111 have shed 19.3 percent in price in that time, with
their yield climbing nearly a full percentage point to 4.88
percent.
Still, the questions around Penney’s future suggest more
volatility ahead. Its credit default swaps, insurance against a
default, price a nearly 65 percent default probability in five
years and 85 percent over 10 years, according to data from
Markit. For some bond mavens, that’s just too much risk to take
on.
Portfolio manager Bonnie Baha, who heads Global Developed
Credit at DoubleLine, said the $57 billion bond house has had
Penney bonds on its “avoid” list for years and doesn’t buy the
argument that Penney’s swooning securities don’t take into
account the value of the retailer’s real estate.
“In the era of Amazon.com and other online retailing, I
don’t think much of legacy real estate assets of the Big Box
stores,” Baha said.
