J.C. Penney pummeled on poor guidance; Intelsat retreat continues; Venezuela, PDVSA bonds rally

By Paul Deckelman

New York, Oct. 27 – In what traders said was a mostly quiet market in the bonds of underperforming and distressed companies on Friday, struggling retailer J.C. Penney Co. Inc. was one of the exceptions to the rule.

Its notes fell sharply after it warned of a wider third-quarter loss than analysts have been predicting.

Also in the retailing sphere, the traders saw some improvement in Rite Aid Corp.’s bonds, which had fallen badly on Thursday on investor fears that internet retailing giant Amazon.com might be eyeing an entry into the prescription drug business.

Elsewhere, traders said that communications satellite company Intelsat SA’s notes were lower throughout its capital structure in fairly active dealings, a day after the company posted lackluster quarterly numbers.

In the emerging markets space, traders said that Venezuela and its state-owned oil company, Petroleos de Venezuela SA, rallied after PDVSA announced it had made an $842 million amortization payment on its 2020 notes.

JC Penney paper punished

“JC Penney kind of got beat up,” one of the traders said, seeing the underperforming Plano, Texas-based department store operator’s 5.65% notes due 2020 having plummeted by 6 points into “a 91-92 ZIP code.”

A second trader agreed, locating those bonds at 91½ bid going home, down 5½ points on the day, with over $29 million traded. Its 5 7/8% notes due 2023 likewise retreated, ending at 97¼ bid, with over $12 million traded.

The first trader attributed the carnage to the company’s pre-earnings announcement forecast. “They cut their outlook – and that was really bad.”

Penney said that it expects to lose between 40 and 45 cents per share when it reports fiscal third quarter numbers – far wider than the 18 to 20 cents of red ink that analysts had been expecting.

Rite Aid recovery

However, not all of the news coming out of the retail space on Friday was bad.

A trader said that Rite Aid’s bonds were better after having been beaten up Thursday on investor fears that giant internet retailer Amazon.com might be eyeing a possible entry into the prescription drug business, which would be a serious setback for Camp Hill, Pa.-based Rite Aid, the Number-Three U.S. drugstore operator, and larger rivals CVS and Walgreens to whom Rite Aid is in the process of selling nearly 2,000 of its stores for a little over $4 billion.

Thursday’s decline had been sparked by news reports that Amazon, which has taken much market share from a variety of traditional brick-and-mortar stores, had received licenses to conduct a wholesale pharmacy business from as many as a dozen U.S. states.

But on Friday, Rite Aid’s most widely traded issue, its 6 1/8% notes due 2023 – a big loser on Thursday – had moved back up by nearly a ½ point to 93 bid, with over $30 million having traded. Its 6¾% notes due 2021 were seen holding steady a little under par, with nearly $30 million of turnover.

Intelsat issues off

Traders saw continued weakness in the bonds of Luxembourg-based communications satellite company Intelsat, which had fallen on Thursday after the company released what analysts termed disappointing third-quarter earnings.

“Intelsat was active again,” a trader said and, while he acknowledged that the bonds “did bounce off their lows” for the day, he added that “they still finished down a few points.”

He saw its Intelsat (Luxembourg) SA notes trading around 63 or 64, while the company’s secured Intelsat Jackson Holdings SA were around the par level.

A market source at another desk saw the Intelsat (Luxembourg) 7¾% notes due 2021 at 63 bid, calling them down nearly 4 points on the session, with more than $46 million of turnover.

Its 8 1/8% notes due 2023 closed at 61¼ bid, down more than 3 points on volume of over $14 million.

He saw Intelsat Jackson’s 9¾% notes due 2025 ending right at par, down 1 3/8 points on the session, with more than $26 million having traded.

Venezuela in focus

In the emerging markets space the recently embattled sovereign bonds of Venezuela and paper from Petroleos de Venezuela rallied in the secondary market after PDVSA, the state-owned oil company, announced it had made an $842 million amortization payment on its 2020 notes. While investors didn’t necessarily have the money in hand, investors trust that the payment would be arriving within days, a New York-based analyst said.

“The payment process is going to take longer now than it did before sanctions and bondholders understand and are more tolerant,” the analyst said.

The PDVSA 2020 notes traded up to 85.25 bid, 86.25 offered after opening Friday at 81.5 bid, 82.5 bid and up from the upper 70s on Thursday.

From the lows, the 2020 note had moved up 6 or 7 points, a New York-based trader said.

Optimism over the payment and the belief that it now looks likely that PDVSA will pay its upcoming maturity – and together with the sovereign will pay a smattering of coupons due as well – caused the whole curve to surge.

“This implies that they are going to make the maturity. They would be stupid to make this payment and in a few days miss $1.2 billion,” the analyst said.

A trader said that the rally “took up my entire day,” forcing him to ignore other things going on in the market like new issues.

Most of the paper along the entire curve was up 3 points to 4 points, the trader said.

The Venezuela 2019 bond was an outperformer, jumping 4 points to 5 points, or about 10%, to 48.5 on Friday.

After the 2017 bonds are repaid next month, there will be a reprieve of several months in which no payments will be due. “During that short period bond prices will have room to climb higher,” the analyst said.

But Venezuela’s fiscal challenges are not over. Nevertheless, the nation’s oil exports to the U.S. have been declining steadily, and without that revenue from those exports, debt payments will remain difficult, the analyst said.

The most recent level of oil exported to the United States was the lowest level in the past two years at 350,000 barrels a day, which is down by more than half from 800,000 barrels a day.

U.S. refiners have been shifting their oil purchasers away from Venezuela to nations like China, India and Russia. Even though the distance is much longer, it is getting increasingly difficult to get credit from the U.S. for Venezuelan oil, the analyst said.

-Rebecca Melvin contributed to this review

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