Though retailer J. C. Penney (JCP) has undergone multiple management changes and significant volatility in the price of its equity and debt over the last few years, the company nonetheless retains some of the qualities of the classic “fallen angel,” according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs. Fallen angels are generally large, well known corporations that were investment grade at the time they issued debt, but were subsequently downgraded to “junk” status.
“J. C. Penney is a recognizable, long-established brand name. As such, its financial woes have attracted considerable attention from both the media and a variety of well-known investors,” Rodilosso said. “While the basic business has struggled, the company has a real estate portfolio that could provide sufficient coverage of its senior secured liabilities and help to provide a potential floor on recovery value for its unsecured debt in a liquidation scenario.”
Rodilosso noted that J. C. Penney is pursuing cost cutting and margin improvement, and that it is highly focused on maintaining liquidity and, ultimately, addressing its high degree of leverage relative to its major competitors. In the latest quarter, JCP’s bottom line improved due to expense cuts, allowing the company to post a small, but positive, quarterly EBITDA1 figure for the first time in more than a year.
“Though there has been some near-term improvement, it is very far from clear that J. C. Penney is out of the woods from an ongoing business perspective,” Rodilosso said. “While at least partial recovery for bondholders is not necessarily dependent on success for the business given the value of the assets potentially available to creditors in a bankruptcy, a convincing recovery in the company’s operations would still present a much better scenario. And, while situations like this may offer an opportunity, they require close monitoring and analysis to determine what value, if any, the bonds may hold given current market price and outlook.”
Market Vectors offers the Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), which tracks an index of below investment-grade corporate bonds denominated in U.S. dollars, issued in the U.S. market that were rated investment grade at the time of issuance. ANGL invests in high-yield bonds, which may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. J. C. Penney bonds accounted for a 0.93% weight as of February 28, 2014.
Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield Bond ETF (NYSE Arca: IHY®), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Renminbi Bond ETF (NYSE Arca: CHLC®), and Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM). As of December 31, 2013 the total assets for these ETFs amounted to approximately $1.4 billion.
1EBITDA (Earnings Before Interest, Taxes, Depreciation, and Appreciation) a financial performance measure used to analyze and compare a company’s profitability.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Global.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $22.1 billion in assets under management, making it the seventh largest ETP family in the U.S. and 10th largest worldwide as of December 31, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict, and social instability. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. The Funds may be subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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