Credit derivatives traders concerns about a rumored leveraged buyout of J.C. Penney eased last week, pulling the Plano, Texas-based retailer's credit spread back to 220 basis points after widening nearly 200 basis points earlier in the month. Protection on the retailer is still significantly wider than before talk of a leveraged buyout broke when its spread stood at 85bps, a trader said.
The protection buying frenzy started on March 31, when Women's Wear Daily printed a story about Cerberus Capital Management, a New York-based hedge fund, thinking of buying out Penney for up to USD18 billion. Cerberus' hire of a former-Penney executive fueled the speculation.
"There are companies who have underlying assets and have fairly low amounts of leverage on their balance sheets and they can go out and buy companies and get a higher return for the borrowed amount," the trader said, adding, "Stocks go up and bonds get hit bad." Between March 30 and 31, Penney's stock jumped almost USD4.00 to USD51.79 from USD47.78 per share at the market's close. Last Wednesday its share price was trading at USD47.96.
Standard & Poor's, which rates Penney at BB plus, has the retailer on positive outlook. Gerald Hirschberg, an S&P analyst in New York, noted in a report published last Tuesday if Penney stays on track and maintains strong cash and liquidity positions and it focuses on operational improvements, its rating will have the potential for upgrade.
