Disclosure Process Comes Under Fire
Confusion over a high-yield bond that will be called this week is causing some investors to call for reforms in the process through which the investing community is informed of material information.
Confusion over a high-yield bond that will be called this week is causing some investors to call for reforms in the process through which the investing community is informed of material information. Earlier this month, retailer J.C. Penney Co. announced deep within a press release that it plans to call its 9 3/4% notes of '21 and its 6%s of '06 this week. Yet because the decision came as part of its announced sale of the Eckerd Corp. pharmacy chain earlier last month and subsequent share buyback plans, J.C. Penney's intention to call the bonds at par went unnoticed by some investors and at least one dealer. In fact, one high-yield investor said he bought a $20 million block of J.C. Penney on Aug. 18, after he was informed by a dealer the bonds had not been called. "We bought the bonds at a premium to par on expectations of a positive return of 2%, which instead turned out to be a negative return of 3%," said the investor. The dealer has since adjusted the price of the trade and has made amends with the investor. He declined to name the dealer. While this instance has apparently been rectified satisfactorily, high-yield professionals said how the market is informed of significant decisions such as calling a bond at par is anything but. They add the mistake is noteworthy because J.C. Penney is high-profile and its debt is large and liquid and the case could repeat itself in the future as many deals are refinance-able in the current environment.
"If the Securities and Exchange Commission put out a rule that a company must put out a press release when it calls its bonds, that would solve this problem," stated Larry Post, president and ceo of Post Advisory Group in Los Angeles, a money manager with $5 billion in high-yield under management. Companies are required to notify existing bondholders and the trustee when a bond is called, but they are not required to notify the market at large. "In the first three weeks of August, there were 400 headlines on J.C. Penney, with almost 70 on Aug. 2. One would have a lot easier time picking out the news if it were in the headline, rather than buried in a 20-page release. It's a company that puts out a press release every time it puts out new underwear," quipped one investor.
A call to Robert Cavanaugh, executive v.p. and cfo of J.C. Penney, was returned byTim Lyons, spokesman. He said the company did everything it was required to do including notifying J.P. Morgan, the trustee, 30 days before calling the bonds. Trustee officials referred all inquiries to Tom Johnson, spokesman for J.P. Morgan, who would not even confirm the bank is the trustee for the bonds in question. He also declined to detail its call notification procedure.
Buy- and sell-side professionals agreed the case is unusual because such a big name fell through the cracks. "This instance absolutely highlights the importance of a trusting relationship with a dealer," said Tom LaPointe, portfolio manager at Columbia Management Group in Boston.