After speculation that bears had their way with J.C. Penney Company, Inc. (NYSE:JCP)’s stock, comes news that the retailer’s debt also faced similar shorting by Marathon Asset Management, a major $10 billion global hedge fund investing in credit and fixed income markets across the globe, and founded by Bruce Richards (CEO) and Louis Hanover (CIO).
According to Bloomberg‘s Kelly Bit, Marathon made its short play on J.C. Penney Company, Inc. (NYSE:JCP)’s debt through the 5-year credit default swap mechanism, commencing sometime early this year. The swaps cost it an average of 340 basis points. Marathon exited the short, at around 700 basis points, by July, making about a 100 percent profit.
According to Marathon, it initiated the short strategy “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.”
It may be noted that J.C. Penney Company, Inc. (NYSE:JCP), is in the midst of a turnaround being engineered by CEO Ron Johnson, and supported by 18 percent stake-holder and activist investor Bill Ackman.
J.C. Penney Company, Inc. (NYSE:JCP), recently reported a dismal second quarter, affected by pricing decisions and a cutback on marketing activity. Declining sales and a $147 million loss led to a revision in the market perception of risk on its credit. As a result the five-year CDS on its credit have rocketed to 919 basis points as of August 10, fully validating Marathon’s investment decision, though the fund exited somewhat earlier.
“Marathon’s core competency is distressed and situational investing in the global credit and fixed income markets. Credit selection is based on Marathon’s bottom-up fundamental research, capital structure, and situational expertise. Marathon pursues a highly-integrated, research-intensive approach utilizing synergies across its platform.” – Investment philosophy, www.marathonfund.com.
Read an interview with Marathon CEO Bruce Richards here on ValueWalk, where he discusses opportunities in credit.