Marathon Shorted J.C. Penney Betting Against Ackman Plan

J.C. Penney’s Turnaround Deepens Bond Losses
Pedestrians walk past a J.C. Penney Co. Inc. store. Photographer: Daniel Acker/Bloomberg

Marathon Asset Management LP, the $10 billion global credit hedge fund founded by Louis Hanover and Bruce Richards, shorted debt of J.C. Penney Co. in the first half of this year, betting against a turnaround plan backed by activist investor Bill Ackman.

Marathon started wagering against the company through 5-year credit default swaps early in the year, the New York-based firm said in a letter obtained by Bloomberg News dated Aug. 8. Marathon closed most of the position in early July at levels near 700 basis points, about double the level at which the hedge fund bought them, according to the letter.

Marathon said a plan by Chief Executive Officer Ron Johnson to turn around the fourth-largest department-store chain, coupled with continuing declines in sales, was likely to push up the company’s credit risk. Johnson’s plan is supported by Ackman’s Pershing Square Capital Management LP, which holds an 18 percent stake in the company. Ackman at a conference last month said he may make 15 times his investment in the retailer.

“Given the ongoing business declines, high leverage, risky and likely unsuccessful shift in pricing strategy (which has proven troublesome for other retailers), and potential for negative catalysts such as earnings announcements, we initiated a short position in JCP credit risk through 5-year credit default swaps in early 2012,” Marathon said in the letter.

Credit default swaps are contracts that pay the buyer face value if a borrower fails to meet its obligations, minus the value of the defaulted debt. An increase in the swaps indicates that derivatives traders view the company as more risky.

Swaps Surge

Five-year credit-default swaps on J.C. Penney have surged to 919 basis points as of Aug. 10, rising 31 percent since Marathon exited most of its position last month. Marathon said in the letter that it bought the swaps at average levels of under 340 basis points. J.C. Penney shares fell 3 percent to $22.69 at 11:37 a.m. in New York trading.

Russell Sherman, a spokesman for Marathon Asset Management, declined to comment on the letter, as did Joey Thomas, a spokesman for Plano, Texas-based J.C. Penney.

Marathon reduced its bets against European sovereign debt as part of a more conservative stance the firm has taken in recent months as the region’s crisis remains unresolved and the global economy slows, the firm said in the letter. The likelihood that Greece may exit the euro has risen and Spanish banks may need more aid, Marathon said.

Greek Exit

“The probability that Greece exits the euro zone has increased in recent months as government initiatives have failed to meet conditions specified in previous rescue commitments,” Marathon said. “In our view, markets seem resigned to the likelihood of another Greek restructuring and possibly even a ‘Grexit’ in 2013 or beyond.”

Hanover said in a July letter to investors that he planned to move to London as Marathon seeks to identify distressed investments in the European Union. Hanover will spend three weeks each month in London and one week in New York, where he’s currently based.

Positions in defaulted and distressed companies, including those undergoing past or likely restructurings or bankruptcies, contributed about 0.8 percent to the Marathon Special Opportunity Fund’s 0.5 percent net gain last month, the firm said in the letter. The advance brings yearly returns to 7.7 percent.

Marathon was founded in 1998 and specializes in global credit, including high-yield, bank, distressed and emerging-market bonds, structured finance, debt transactions and real estate.

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