Going For The Kill: Is Carl Icahn Trying To Bankrupt Bill Ackman's J.C. Penney?

Tyler Durden's picture


By now everyone is familiar with slow-motion trainwreck from the afternoon of January 25 (keep that date in mind), when America's premier financial Jerry Springer channel pitted one against another hedge fund moguls Carl Icahn and Bill Ackman (for those three people who missed it, here it is again). Which is why we won't waste time recapping it, suffice to say that as a result of the hour-long spat, both Ackman and Icahn left the screamathon hating each other more than ever.

In what may or may not be a totally separate event, we fast forward to January 29, or the following Tuesday, when JC Penney received a Notice of Default from the law firm of Brown Rudnick, representing an ad hoc group of bondholders of JC Penney's 7.4% of Debentures due 2037 and who supposedly hold more than 50% of the issue, which according to Bloomberg amounted to some $325.6 million outstanding ($400 million at issue), or about 11% of the firm's gross debt of $2.97 billion.

What happened is that one or more bondholders accumulated a sufficiently large stake in one of JCP's bonds to where they could throw the company into involuntary bankruptcy which would then accelerate payment on all bonds if a court found the bondholder claim to be valid, and which would destroy the firm's equity due to cross-default provisions between the various bond classes, if only bondholders had a sufficiently real pretext. Which they did.

Specifically, Brown Rudnick alleges that the company defaulted on the bond indenture when in January 2012 it signed a credit agreement secured by the company's inventory "without providing for equal and ratable security for the Debenture holders." JCP only disclosed this letter after the close today, when it concurrently filed a lawsuit in Delaware Chancery Court seeking to block the bondholders' efforts to declare a default, saying the Notice of Default was without merit. To wit:

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.

A cursory read of the explanation provided by JCP's lawyers in response to the Notice of Default should make the JCP shareholders, all of whom would be immediately and massively impaired in the event the Involuntary Bankruptcy resulted in an official Chapter 11 filing, very nervous, since neither the "principal property" justification, nor the ridiculous excuse that the security stripping credit facility doesn't really count as it was never drawn on it, would withstand much scrutiny on cross before any but the most inexperienced of bankruptcy judges.

But what should make JCP stakeholders most nervous is that the man behind the ad hoc group may well be none other than the abovementioned corporate raider (and legendary Involuntary Bankruptcy mastermind) Carl Icahn, who is now hell-bent on making Ackman's life a living hell in the aftermath of the January 25 televized fiasco, and who will stop at nothing to crush and humiliate Ackman's hedge fund Pershing Square, which also happens to be the largest holder of JCP common stock with some 17.8% percent of the outstanding, or about $800 million worth of stock.

Note: we said may. Not is. Because we won't know for sure until Icahn confirm or denies.

Yet some things stand out.

First: the credit agreement was signed on January 2012: in other words, it had been in place for over a year. The fact that it was used as the reason for an involuntary bankruptcy filing only after the January 25 screamfest is very suspicious, especially since the defaulted indenture in question had been around since 1994. In other words, someone knew very well the leverage they would have by organizing an ad hoc group of debenture holders for a long time, and were merely biding their time for just the right moment.

Next: a quick glance at the TRACE activity in the 7.4% of 2037 shows that the biggest one day trading activity in the recent past was on none other than the abovementioned January 25. We would not be surprised at all if the bulk of said trading took the form of "wave it in" on the 47th floor of 767 Fifth Avenue.

But surely not even Icahn could promptly accumulate over $163 million bonds in a day (unless he had already been building up a stake), which is why he may have simply decided to collaborate with like-minded holders of the Debentures: either individuals who are seeking a prompt 20% take out (the bonds are trading at 84 cent of par), or simply to push the company into bankruptcy and use existing cash of some $500 million to satisfy bondholder claims, as well as to possibly take control of the company in a debt for equity. In both cases needing individuals who are not too fond of JCP, and certainly not fond at all of the Company's largest shareholder: one William Ackman.

A cursory look on Wall Street reveals quite a few funds who satisfy both criteria.

And finally, let's not forget that Icahn is one of Brown Rudnick's core clients, most recently representing the 76 year old billionaire in the case of Icahn against Trump Entertainment.

All of the above is, for now, conjecture, but it just fits too perfectly: the timing, the approach (so typical of the old school Icahn), and the target: because nothing would crush "retail expert" Ackman, who is openly feuding with Icahn over Herbalife, as a JC Penney bankruptcy. And nothing would bring greater validation to Icahn's claim that he "does not respect Ackman as an investor", uttered during the infamous January 25 debate.

We look forward to Mr. Icahn rejecting or confirming this hypothesis: the former case likely revealing who else is not a fan of Mr. Ackman's, while the latter pushing the Ackman vs Icahn soap opera to unprecedented and unseen before levels of inter-hedgefunder animosity, and shine even more light on the strange and confusing world where billionaires have so much money all they care about is destroying the reputation of those they perceive as their competition: a world in which ego is everything.

Of course, if we are right, and if indeed Icahn is behind this latest "Involuntary Bankruptcy" corporate raid, our sincerest condolences and best wishes to the JCP shareholders.

They will need it.

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Mon, 02/04/2013 - 22:58 | 3215299 rhinoblitzing
rhinoblitzing's picture

What about the employees?

Mon, 02/04/2013 - 23:09 | 3215327 Son of Loki
Son of Loki's picture

The who?

Mon, 02/04/2013 - 23:10 | 3215331 Almost Solvent
Almost Solvent's picture

Took me almost an hour to find any last time I happened to shop there a few weeks back. 

Mon, 02/04/2013 - 23:21 | 3215359 I think I need ...
I think I need to buy a gun's picture

penney's new pricing scheme is horrendous, is this a joke or is this what the oligarchs do when they have some down time, if we arent careful they may dictate what you wear on an everday basis along with all the other things they took,,,,,,is there anything left but clothes?

Tue, 02/05/2013 - 02:03 | 3215620 greyghost
greyghost's picture

lol....jcp hires the queer apple exec. who hires the queer talk show host that insults 98% of jcp customer base....who would have thunk that would turn out bad?

Tue, 02/05/2013 - 02:07 | 3215627 YBNguy
YBNguy's picture

 Ackman's hedge fund Pershing Square, which also happens to be the largest holder of JCP common stock with some 17.8% percent of the outstanding, or about $800 million worth of stock...


Suckers of the year!

Tue, 02/05/2013 - 02:15 | 3215643 otto skorzeny
otto skorzeny's picture

"Masters of the Universe" and these guys hold that much stock in retail? With dumbasses like these why go public if you really care about the business that you built?

Tue, 02/05/2013 - 04:27 | 3215723 strannick
strannick's picture

Exactly. When they could be cornering silver.

And yes, what about the employees, Mr. Icahn?

Tue, 02/05/2013 - 07:05 | 3215789 Thomas
Thomas's picture

I think the moral of the story is never--NEVER--deal with or fuck with Icahn. Period. End of story.

Tue, 02/05/2013 - 08:02 | 3215818 Karlus
Karlus's picture

"NEVER--deal with or fuck with Icahn. "

Boom, headshot

Tue, 02/05/2013 - 10:36 | 3216103 quadcap
quadcap's picture

Why does this have three down arrows?  Anybody who watched the icahn/ackman "debate" knows icahn is a douche.  Is icahn trying to curry favor here on zerohedge?   What a smack.  Ackman appears to have fucked with the wrong guy, that much is pretty plain.  His analysis of Herbalife is right on, but that's not going to save him in this case....

Tue, 02/05/2013 - 02:20 | 3215650 knukles
knukles's picture

25%  That's what 20 points on an bond trading at 80 being taken out at par is...

Not bad peanuts in today's world.

When ya got em by the balls their hearts and minds inevitably follow.
            -Chuck Colson, no?

Tue, 02/05/2013 - 07:07 | 3215791 CPL
CPL's picture

My grandmother had that in needle point in the kitchen next to "may you be in heaven half an hour before the devil knows you're dead".


What should be interesting to watch is while Icahn is messing around with Ackman's crappy retail chain are the other business owners waiting for Icahn to finish depleting his energy and resources tilting at windmills.  Et tu brute...et tu?

Tue, 02/05/2013 - 12:05 | 3216396 Panafrican Funk...
Panafrican Funktron Robot's picture

Yeah, but in order for this bond to actually return par at maturity, JCP has to exist until 2037.  I would suggest it's still massively overpriced.  

Mon, 02/04/2013 - 23:28 | 3215367 rhinoblitzing
rhinoblitzing's picture

I saw them a few months ago - Pete walked off the stage at the end and left Roger to finish the show. </sarc

Yeah.... Who..... Anyone catch Jaime on Bloomberg today for over an hour taking questions in Miami. Amazing that building on Brickell Ave reflects all the canyons that devestated this country. He glowed about all the foreigners buying the property and all the immigrants that moved into the US and Miami. Nothing but softballs from the crowd and he opened it up to any questions. The best parts were calling legislation "Simpson Balls" and tellling younger people they should work till 70 or longer. (surprising Tyler did not link to it or follow up - plenty of sound bytez)

Yeah - The Who??

Mon, 02/04/2013 - 23:13 | 3215333 ACP
ACP's picture

There are only three things running the US economy nowadays:

1) The Fed,

2) The stock market,

3) Big egos.

The rest is fast becoming an empty shell.


Mon, 02/04/2013 - 23:25 | 3215358 wee-weed up
wee-weed up's picture

There is only one thing running the US economy nowadays:

1) The Fed

Mon, 02/04/2013 - 23:29 | 3215380 RopeADope
RopeADope's picture

Nothing is running the US economy these days.

Mon, 02/04/2013 - 23:30 | 3215382 TruthInSunshine
TruthInSunshine's picture

There is only one thing running the economy these days:


1)  Bullshit*


*Otherwise known as The Confidence Fairy

Mon, 02/04/2013 - 23:32 | 3215390 ACP
ACP's picture

True, without #1...#2 & #3 wouldn't exist.

Mon, 02/04/2013 - 23:47 | 3215426 bobthehorse
bobthehorse's picture

They don't care about the employees.

These assholes play for blood.



Tue, 02/05/2013 - 01:04 | 3215544 Political_Savage
Political_Savage's picture

Stop posting bobtheass

Tue, 02/05/2013 - 01:35 | 3215590 Augustus
Augustus's picture

Maybe Hostess is hiring?

Tue, 02/05/2013 - 01:37 | 3215592 Ignatius
Ignatius's picture

"What about the employees?"


The tribe is being run almost exclusively for the benefit of those who own it and run it, not the tribe itself.

Cui BonoWho benefits? is a big principal.  The Romans knew the score 2000 years ago.

Tue, 02/05/2013 - 01:48 | 3215609 Milton Waddams
Milton Waddams's picture

"collateral damage"

oddly enough, pink floyd got it kind of right


Tue, 02/05/2013 - 01:53 | 3215613 taniquetil
taniquetil's picture

They will all be issued new ObamaFones.

Tue, 02/05/2013 - 07:49 | 3215811 LongSoupLine
LongSoupLine's picture

Two rich, egotistical fucking cocksuckers with fucking tunnel vision and no fucking regard for the collateral damage they inflict.

Fuck you hedge fund assholes. Eat a fucking hot lead projectile you fuckers.

Tue, 02/05/2013 - 08:23 | 3215841 Chuck Walla
Chuck Walla's picture

What about the employees?

Its just an invol BK. It will be a going concern, there will be DIP financing.  Not much will change.


Tue, 02/05/2013 - 09:35 | 3215964 goldenbuddha454
goldenbuddha454's picture

Would start looking for employment at McDonalds

Mon, 02/04/2013 - 23:02 | 3215308 FrozenOut
FrozenOut's picture

Just because it's bankrupt, doesn't mean it has to cease operations. Which is why a bankruptcy would have been the right procedure for Chitty-Chitty Bank, GM, Chrysler, Morgan Stanley, AIG, etc. etc. back in '08. Another positive is that the "suicidal management who got the company in trouble in the first place," to quote Gordon Gekko, get well and truly ass-reamed. 

Mon, 02/04/2013 - 23:38 | 3215340 Mercury
Mercury's picture

Bankruptcy tends not to do wonders for your equity share price however. And Ackman's fund is the biggest shareholder.

This kind of reminds me of 2005 when 150 yr old Kirk Kerkorian tried to impress his new girlfriend by making an out of the blue tender offer for GM stock, blowing the convertible bond arbitrageurs out of the water in the process.

Nothing rattles assumptions like when old wizards come out of their towers and start casting malignant spells.

Invoke accelerate pecunia covenantorum Icahnoclasm!!

Take that young prince William.

Tue, 02/05/2013 - 00:59 | 3215538 Freddie
Freddie's picture

I have no great love for Icahn but Ackman is a creep f*ck.  I recall a REIT he did a number on.  I feel sorry for the JCP shareholders, employees and bondholders.  JCP is not a great store but it is as good as that crap store Kohls owned by that former Wisc Dem Senator'ss slimy family.

Tue, 02/05/2013 - 02:16 | 3215551 otto skorzeny
otto skorzeny's picture

The Kohl's-another member of the 12 Tribes of Thieves. These leeches fight it out in public and then go to synagogue and have a good laugh over fucking the goys out of $ again and again-and then they wonder why they've been kicked out of every country in the civilized western world(save for their current host body-The USofA)

Tue, 02/05/2013 - 08:07 | 3215820 Karlus
Karlus's picture

Dont feel sorry for JCP. Bad decisions landed them here. You love delicious sausage, but dont want to know hats in it or how its made.

JCP made themselves the meal here

Tue, 02/05/2013 - 09:47 | 3215993 goldenbuddha454
goldenbuddha454's picture

Yes, you can't really expect to be competitive in the retail sector until you evacuate every money-losing mall, cut your losses and go primarily to selling on the internet.  Noone shops at malls anymore, yet I still see JC Pennys occupying 'mallstreet' in large numbers.   Sears ditto.  Heck, Sears still has these small sideshow outlets strewn all around town that sell lawnmowers, fix and repair refrigerators, washers and dryers, remanufacture weed eaters.  Most that stuff you could find a great deal on at Craigslist or just go to harborfreight.  The days of paying up for crap made in China are over.  Whoever can sell the crap for the least amount of money wins.  Brand name means squat when considering most everything everywhere is made in China.

Mon, 02/04/2013 - 23:08 | 3215325 Son of Loki
Son of Loki's picture

It's not too tedious bankrupting a store when piss poor management is doing it for you.

Mon, 02/04/2013 - 23:12 | 3215332 BlueStreet
BlueStreet's picture

No worries because they are bringing sales back so it is all fixed.





Mon, 02/04/2013 - 23:46 | 3215423 DeadFred
DeadFred's picture

They'll be able to buy even more shares when the price craters

Tue, 02/05/2013 - 01:20 | 3215573 HardlyZero
HardlyZero's picture

I get it.  The arseholes are selling each other sh*t.  That is the major take away here.  yup.

Mon, 02/04/2013 - 23:15 | 3215339 Michelle
Michelle's picture

The wealthy have to battle each other now since the 99.9% have few to no assets left. Been saying it for a while and it makes me chuckle that we get a front row seat to watch the fireworks on TV. Bring the popcorn and tune in for America's Real Dukes of Hazard.

Mon, 02/04/2013 - 23:52 | 3215437 TruthInSunshine
TruthInSunshine's picture

 Creosote Games

Tue, 02/05/2013 - 08:09 | 3215822 Karlus
Karlus's picture

And Ichan needs to be careful that he does not lean too far over pushing Billinto the pit, lest he loses his balance and someone else takes advantage and pushes Ichan

Mon, 02/04/2013 - 23:15 | 3215341 holdbuysell
holdbuysell's picture

"America's premier financial Jerry Springer channel"


For the record, that would be CNBC.

Mon, 02/04/2013 - 23:24 | 3215365 yogibear
yogibear's picture

Have Charlie Munger and Warren Buffet host it. Their usually amused at others loosing money.

The gladiators of billionaires.

Mon, 02/04/2013 - 23:19 | 3215355 in4mayshun
in4mayshun's picture

I love the new JCP. I knew it wouldn't last. Sigh...God Damn Kohl's

Mon, 02/04/2013 - 23:31 | 3215386 otto skorzeny
otto skorzeny's picture

penneys/sears shoppers make the stores by me look like tijuana

Mon, 02/04/2013 - 23:22 | 3215361 Fix It Again Timmy
Fix It Again Timmy's picture

Any large-scale brick and mortar retail sales company with ANY debt is headed for the leper colony...

Tue, 02/05/2013 - 01:14 | 3215563 otto skorzeny
otto skorzeny's picture

name one that's not-the only way they book a  profit is from cheap sweatshop labor

Mon, 02/04/2013 - 23:25 | 3215370 max2205
max2205's picture

Hope they both detonate each other

Mon, 02/04/2013 - 23:29 | 3215376 azzhatter
azzhatter's picture

two assholes and one shitty company

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