J.C. Penney Bonds Change Of Control A Good Thing?

Mar. 6.13 | About: J.C. Penney (JCP)

The bonds of J.C. Penney (NYSE:JCP) have a change in control provision that bondholders might want to review. Why? The Wall Street Journal is reporting that the board of J.C. Penney might be considering a sale in this article. The bonds are rated non-investment grade so depending on the buyer and structure of any potential deal, the event might benefit bondholders.

The first issue reviewed.

  • $400 million of 5.65% Senior Notes due June 1, 2020, prospectus.

If I am reading the language correctly the "rating event" that would trigger the bonds to be repurchased requires a downgrade after the announcement of a change in control.

"Change of Control Triggering Event" means the occurrence of both a Change of Control and a Rating Event.

"Change of Control" means the occurrence of any of the following: (1) any event requiring the filing of any report under or in response to Schedule 13D or 14D-1 pursuant to the Securities Exchange Act of 1934, as amended, disclosing beneficial ownership of either 50% or more of the common stock of J. C. Penney Company, Inc. then outstanding or 50% or more of the voting power of the voting stock of J. C. Penney Company, Inc. then outstanding; (2) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of J. C. Penney Company, Inc. or JCPenney and their respective subsidiaries taken as a whole to one or more Persons other than J. C. Penney Company, Inc. or one of its subsidiaries; or (3) the first day on which a majority of the members of J. C. Penney Company, Inc.'s Board of Directors are not Continuing Directors.

"Rating Event" means (1) if the notes are not rated Investment Grade by each of the Rating Agencies on the first day of the Trigger Period, the notes are downgraded by at least one rating category (e.g., from BB+ to BB or Ba1 to Ba2) from the applicable rating of the notes on the first day of the Trigger Period by each of the Rating Agencies on any date during the Trigger Period, or (2) if the notes are rated Investment Grade by each of the Rating Agencies on the first day of the Trigger Period, the notes cease to be rated Investment Grade by each of the Rating Agencies on any date during the Trigger Period. If a Rating Agency is not providing a rating for the notes at the commencement of any Trigger Period, the notes will be deemed to have been downgraded by at least one rating category or have ceased to be rated Investment Grade, as applicable, by such Rating Agency during that Trigger Period.

What happens if a change in control event triggers?

Upon the occurrence of a Change of Control Triggering Event (as defined herein), we will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. See "Description of Notes-Change of Control."

The next issues reviewed. $300 million 5.75% due February 15, 2018, and $700 million 6.375% due October 15, 2036, prospectus. It would appear that these issues require the bonds to be rated below investment grade with a change of control. In the event of a sale of the company these bonds might be subject to repurchase.

"Below Investment Grade Rating Event" means that notes are rated below an Investment Grade Rating by each of the Rating Agencies (as defined below) on any date from the date of the public notice of an arrangement that could result in a Change of Control until the end of the 60-day period following public notice of the occurrence of the Change of Control (which 60-day period shall be extended so long as the rating of the notes is under publicly announced consideration for possible downgrade by any of the Rating Agencies).

"Change of Control" means the occurrence of any of the following: (1) any event requiring the filing of any report under or in response to Schedule 13D or 14D-1 pursuant to the Securities Exchange Act of 1934, as amended, disclosing beneficial ownership of either 50% or more of the common stock of J. C. Penney Company, Inc. then outstanding or 50% or more of the voting power of the voting stock of J. C. Penney Company, Inc. then outstanding; (2) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of J. C. Penney Company, Inc. or JCPenney and their respective subsidiaries taken as a whole to one or more persons (as defined in the Indenture) other than J. C. Penney Company, Inc. or one of its subsidiaries; or (3) the first day on which a majority of the members of J. C. Penney Company, Inc.'s Board of Directors are not Continuing Directors.

"Change of Control Triggering Event" means the occurrence of both a Change of Control and a Below Investment Grade Rating Event.

What happens if a change in control event triggers?

Upon the occurrence of a Change of Control Triggering Event (as defined herein), we will be required to make an offer to purchase the notes at a price equal to 101% of their principal amount plus accrued and unpaid interest to the date of repurchase. See "Description of Notes-Change of Control."

Current bond data as of March 5, 2013.

Pricing and yield information, per FINRA website.

6.375% due October 15, 2036

  • Price 72.750
  • No yield provided.
  • Rating Caa1 (Moody), CCC+ (S&P), B- (Fitch)

5.75% due February 15, 2018

  • Price 80.25
  • Yield 11.045%
  • Rating Caa1 (Moody), CCC+ (S&P), B- (Fitch)

5.65% due June 15, 2020

  • Price 79.5000
  • Yield 9.650%
  • Rating Caa1 (Moody), CCC+ (S&P), B- (Fitch)

How bondholders could benefit.

A sale of the firm that triggers a repurchase with the bonds redeemed at a premium.

An equity raise that improves the financial position of the firm, might see the credit rating stabilize or improve. This might result in an improvement in prices and or credit quality.

The worst case, bondholders have a senior claim versus the common stock. Therefore from a risk-reward situation favors bondholders over stockholders. An added benefit bondholders enjoy is being paid to wait. And given the bond yields exceeded 9% they offer returns close the long term return on equities.

It would be a good idea to review the bond prospectus for further details and condition. And to determine if any details within the prospectus have been revised after the fact.

At times the best investment for total return (income + capital gain/loss) can be the less risk instrument in the capital structure. This appears fit the description.

Let me know if you found this information useful or helpful.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.