Mudrick, Shorting Malls, Says Drop in Retail Is ‘Forever Trend’

Updated on
  • Investor targets securities back by loans of mall opeators
  • Says online shopping hurting retailers like Macy’s, Sears

Jason Mudrick, founder and chief investment officer at Mudrick Capital Management, discusses the issues plaguing the retail industry, as he sees the potential for 50 retailers to file for bankruptcy this year. He speaks with Bloomberg's Erik Schatzker on 'Bloomberg Daybreak: Americas.' (Source: Bloomberg)

Jason Mudrick, whose $1.6 billion Mudrick Capital Management specializes in distressed investments, says he’s betting that the struggle among retailers is here to stay.

“This is a forever trend,” Mudrick, whose Mudrick Distressed Opportunity Fund gained 38.7 percent last year, said in an interview on Bloomberg Television Monday. “When you think about how things are going to look 10 years from now, or 20 years from now, our parents will be dead, our kids will be adults -- you think more people are going to be shopping online or less? This is the Amazon effect and it’s here forever.”

Mudrick is one of a growing number of hedge fund managers who are positioned to profit from a collapse in the sector, which could spur a wave of defaults. Mudrick said he’s targeting securities backed by loans taken by beleaguered mall and shopping center operators who have seen bad news pile up for their anchor chains, including Macy’s Inc. and J.C. Penney Co. He owns credit default swaps on those securities, and said his firm also owned protection against Neiman Marcus Group Inc., which has an active and liquid derivatives market.

While in the past retailers have cited a merchandising problem, now “they’re all saying we need to shrink our footprint,” he said. “I would describe this as a paradigm shift.”

J.C. Penney said in February it plans to shutter up to 140 stores, and Mudrick expects the retailer to close a hundred more locations. Macy’s decided last year to shut some 100 outlets, while Sears Holdings Corp. said it will move to close about 150 locations. These decisions will crush C- and D-level malls, said Mudrick.

Delinquencies on retail loans have risen to 6.5 percent, a percentage point higher than commercial mortgage-backed securities as a whole, according to Wells Fargo & Co.

More from Mudrick on retail and the hedge-fund industry in our TOPLive Q&A

Mudrick also sees opportunities in energy, particularly for companies that are coming out of bankruptcy and may eventually go public. He said he likes Contura Energy Inc., whose shares trade at about $65 over-the-counter because they aren’t registered with the U.S. Securities and Exchange Commission, a steep discount to publicly traded peers. “We suspect Contura will go public at some point this year because the board has to be aware of this discount,” said Mudrick.

The manager said the flow of cash into high-yield assets by mutual funds is a big concern because they promise liquidity to clients that may “evaporate” in times of economic uncertainty. He’s shorting the high-yield index as a cheap hedge on his portfolio, he said in a separate interview on Bloomberg’s TOPLive.

Mudrick said he’s positioning his hedge fund to take advantage of dislocations in the credit market that computer-driven trading firms are, for the time being, unable to trade.

“We’re fortunate in that computers can’t trade distressed credit, and it’s very difficult to get exposure to the things we invest in through other avenues,” he said. “I believe our style of investing will have a place in allocators’ portfolios for the foreseeable future.”

— With assistance by Rachel Evans, and Matt Scully

(Updates with comments on energy in seventh paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE