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Investors diverge on future of JCPenney

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(Credit: Reuters) The image is the frontage of one of the larger JC Penney stores.JC Penney
November 9
6:55 AM 2013

A number of the largest purchasers of distressed debt have been looking at JCPenney in the past few months. The opinions on the debt situation of the beleaguered retailer has differed as to its effect on the future for JC Penney.

One of the interested parties is Avenue Capital Group LLC of Marc Lasry. While currently the firm has a portfolio worth USD12 billion, it still purchased unsecured bonds with the expectation that JCPenney CEO Mike Ullman would be able to turn the retailer's fortunes around in a short period of time. On the other end of the spectrum is Third Avenue Management LLC, which manages a portfolio of USD13.5 billion. It had recently sold off its bondholdings in the retailer after it had decided to take out a USD2.25 billion loan last May. This to Third Avenue's calculations, made the retailer more riskier in the long run.

There are those that are playing it safe by investing in the USD2.25 billion term loan that JC Penney took out and secured by the company's real estate holdings and inventories. According to people with knowledge of the matter, the loan trades carry a slight discount on face value. It also has a provision that in the event of financial restructuring at the retailer, the said bonds would be converted to equity, allowing bondholders more influence over the future decisions done by the company.

This specific loan is also deemed at a senior position against other existing debt. This would mean it would be first in line in terms of repayment as against other debt chargeable to the company. This is the factor that pushed Third Avenue to unload its position. According to Third Avenue Real Estate Value Fund manager Ryan Dobratz, "Although the secured financing alleviated liquidity concerns, the bonds were pushed lower in pecking order in terms of the claims on the company's assets."

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