J.C. Penney (JCP) filed its 10-K on Wednesday (here), and I’ll have an article to address the filing in the coming days (I want to take a hard look at it this weekend). In addition to the 10-K, the company was out with an 8-K as well (here); here’s a reprint of the key paragraph (emphasis added):
“On February 4, 2013, J. C. Penney Company, Inc. (the 'Company') received a letter (the “Letter”) dated January 29, 2013 from counsel for an ad hoc consortium of holders of more than 25% of the Company’s 7.4% Debentures due 2037 issued under an Indenture dated April 1, 1994 (the “Indenture”) purporting to be a Notice of Default under the Indenture. The Company believes that the Letter does not constitute a valid Notice of Default and filed suit on February 4, 2013 in Delaware Chancery Court against U.S. Bank National Association, as Indenture Trustee under the Indenture, seeking injunctive relief and a declaratory judgment that the Company is not in breach of the Indenture. On March 18, 2013, the Company received a letter from the bondholders’ counsel withdrawing and rescinding the Notice of Default.”
At the time of the original letter (Feb. 4), the company said the following in a press release (emphasis added):
"Brown Rudnick LLP alleges that the Company violated the Indenture by entering into an inventory-secured Credit Agreement in January 2012 without providing for equal and ratable security for the Debenture holders. However, the granting of a security interest in inventory pursuant to the Credit Agreement does not constitute an event of default under the Indenture. Pursuant to the Indenture, the negative covenant extends only to 'principal property' -- which does not include inventory. Furthermore, the Company has never had any loans outstanding under the Credit Agreement, and because the Indenture only covers “indebtedness for money borrowed,” the Company’s entry into the Credit Agreement would not have triggered the Indenture provision in any case. The Company has publicly disclosed for some 10 years that it has had various undrawn credit facilities secured by inventory with no bondholder allegations of violation of the Indenture.
The Company today filed an action for injunctive and declaratory relief in support of its position in the Court of Chancery of the State of Delaware. The action seeks an order enjoining the trustee from declaring an event of default as well as an order declaring that the Company is not in default of the Indenture governing the Debentures.
Ken Hannah, chief financial officer of jcpenney said, 'We believe this notice of default is invalid, completely without merit and is intended to create self-interested trading opportunities in the market, and we will therefore vigorously defend the interests of jcpenney and all of our constituencies in all appropriate forums.’”
Mr. Hannah repeated those views this past week at the Bank of America Merrill Lynch Consumer & Retail Conference, saying the following (webcast here):
“We’ve been in discussions with Brown Rudnick; there’s a number of people that are involved in this transaction that really don’t care what the outcome is – they’re trying to make a few million dollars on a trade. We’re pushing pretty hard to get this resolved – we’ve been very, very aggressive in terms of our stance; this is something that the company has contemplated and went to great extent to make sure we had opinions on the language, and so this isn’t something where we were caught flat footed… We’re not going to sit here and allow people to come in and create a bunch of volatility in our stock to make a couple million dollars on a trade, and so I think you’ll continue to see us be very, very aggressive in defending our position.”
As someone who has no particular insight on the topic in question, it’s safe to say I’m happy to see this resolved (one less thing to worry about). I’ll publish my thoughts on the 10-K soon.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.