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Kyle Bass Said to Bet on J.C. Penney in Purchase of Debt

Hedge-fund Manager J. Kyle Bass
J. Kyle Bass, managing member with Hayman Advisors LP, shares a bullish view on J.C. Penney Co. with investors Soros Fund Management LLC and Glenview Capital Management LLC, the company’s second- and 10th-largest investors. Photographer: Jonathan Fickies/Bloomberg

Hedge-fund manager J. Kyle Bass is betting on a comeback by J.C. Penney Co., the retailer roiled by falling sales and a dispute with investor William Ackman, according to a person familiar with the matter.

Bass, who focuses on corporate turnarounds, has accumulated a long position in J.C. Penney over the past two weeks by buying the company’s secured loans, said the person, who asked not to be named because the information is private. He has also sold a type of insurance called credit-default swaps to other investors that pays off only if the Plano, Texas-based company defaults on its debts, an event he considers unlikely, said the person.

J.C. Penney has lost almost a third of its value this year as an overhaul started by former Chief Executive Officer Ron Johnson fails to win new shoppers and alienates longtime customers. Ackman, whose Pershing Square Capital Management LP is the company’s largest shareholder with almost 18 percent of its shares, resigned from the board last week after seeking to oust Chairman Tom Engibous and accelerate the search for a new CEO.

Bass, 43, founder of Hayman Capital Management LP in Dallas, shares a bullish view on J.C. Penney with equity investors including Soros Fund Management LLC, the company’s second-largest shareholder, Perry Capital LLC and Glenview Capital Management LLC. Chris Kirkpatrick, Hayman’s general counsel, didn’t return a voice-mail message left at his office after regular business hours.

Stock Rises

J.C. Penney rose 3.9 percent at 12:29 p.m. in New York after reporting that sales declined at a slower pace in the second quarter. The stock has fallen 30 percent this year, compared with a gain of 16 percent by the Standard & Poor’s 500 Index.

The second quarter was the first entirely under CEO Mike Ullman, who returned in April to replace Johnson.

Ullman and Engibous have the board’s “overwhelming support,” J.C. Penney said on Aug. 13. Soros Fund Management and Glenview told the company they also support the executives, people familiar with the matter said last week.

Michael Vachon, a spokesman for New York-based Soros, declined to comment last week on the fund’s Penney stake, while Steve Bruce, a Glenview spokesman at ASC Advisors LLC, said the firm had taken no sides in the dispute with Ackman. Both Soros Fund Management and New York-based Glenview are passive investors in J.C. Penney, according to their securities filings.

Expected Rebound

Bass is betting that J.C. Penney can stabilize sales and has enough cash and credit to carry it until the 2014 holiday season, said the person familiar with the matter. In the hedge-fund manager’s view, the company’s apparel business is rebounding and it is sitting on valuable real estate.

Bass, a former salesman for Bear Stearns Cos. and Legg Mason Inc., started Hayman in 2006 to focus on corporate turnarounds, restructurings and mortgages. The firm made $500 million amid the U.S. subprime crisis. He has been betting on a Japanese fiscal collapse for several years.

Hayman managed $1.6 billion as of March 31, according to marketing documents. The firm had a 384 percent cumulative return since inception.

Credit-default swaps insuring the debt of J.C. Penney against non-payment jumped yesterday the most in more than a week, according to data from CMA in New York.

The yield on the company’s notes due 2020 has surged 178 basis points since July 31 to 11.54 percent, set for the biggest monthly increase since the securities were issued in 2010.

Loan Pricing

Within three weeks of returning, Ullman drew down $850 million of the company’s revolving credit line and negotiated a $2.25 billion loan. It pays interest at 6 percent, according to data compiled by Bloomberg. The debt was quoted at 95.5 cents on the dollar today, down from a high of 101.9 cents on July 23, according to data compiled by Bloomberg.

Ackman joined J.C. Penney’s board in February 2011. He soon pressed to replace Ullman, who had been CEO for more than six years, with Johnson, the executive who helped build Apple Inc.’s chain of retail stores.

Johnson, with Ackman’s support, instituted sweeping changes at J.C. Penney, including ending discounting and remaking the stores into collections of boutiques. The strategy flopped with the chain’s customers, resulting in a $985 million loss for the year ended in February.

The company later ousted Johnson and reinstated Ullman who revived price cutting and brought back merchandise to attract core customers.

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