market folly

Bill Ackman's Pershing Square Capital just filed a form 4 with the SEC regarding a total return swap on J.C. Penney (JCP). On April 13th, they disposed of a total return swap with a conversion/exercise price of $34.15 that represented 602,600 underlying shares.

Due to the terms of the swap with the counterparty, Pershing netted the difference between the expiration price of $34.15 and the $29.29 reference price as established by the swap. Hedge funds often utilize total return swaps to ramp up leverage. We've previously highlighted when Pershing bought total return swaps late last year.

Here's the fine print from the filing:

"Under the terms of the cash-settled total return swap (i) Pershing Square International was obligated to pay to the bank counterparty any negative price performance under $29.29 per share for each of the 602,600 notional number of shares of Common Stock subject to the swap as of the expiration date, plus interest at the rates set forth in the contract, and

(ii) the bank counterparty was obligated to pay to Pershing Square International any positive price performance above $29.29 per share for each of the 602,000 notional shares of Common Stock subject to the swap as of the expiration date. Any dividends received by the counterparty on such notional shares of Common Stock during the term of the swap were to be paid to Pershing Square International as of the expiration date of the swap. At the time of the expiration of the cash-settled total return swap, the price of the reference security was $34.15 per share. All balances have been settled in cash.

As to why the swap was disposed, the fine print reads:

"The swap terminated in accordance with its own terms on April 13, 2012 without action on the part of the Reporting Persons, and, on such date, the Reporting Persons were unable to enter into replacement positions due to regulatory restrictions and the issuer's compliance restrictions. The Reporting Persons may in the future replace the expired swap, subject to any regulatory restrictions, the issuer's compliance restrictions, and any market conditions that may exist at that time."

You can read about Ackman's thesis on JCP here.

And for more recent activity from this investor, head to Ackman's presentation on Burger King.