J.C. Penney’s most discounted item: Its bonds

FORTUNE — J.C. Penney may have a hard time drumming up shoppers to buy its discount clothing items. But the company still has one interesting bargain on the sale rack: its debt.

Some of the retailer’s notes are trading in the mid-70s, suggesting investors think the company is worth less than 80 cents for every $1 of debt. Some smart investors are bracing for it to go even lower. York Capital’s James Dinan recently said at a conference that the $15 billion hedge fund had shorted the bonds, according to press reports.

The company certainly has some work to do. It lost a quarter of its business last year under the watch of chief executive Ron Johnson. On Monday it announced Johnson’s departure, and that J.C. Penney’s former chief, Mike Ullman, was brought back to the helm. The news sent J.C. Penney’s (JCP) shares down more than 12% Tuesday.

The choice to replace the CEO “is logical as no business can sustain more than 25% decline in sales and remain viable for any length in time,” Michael Exstein of Credit Suisse said in a research report. “We wish Mr. Ullman the clarity of judgment to move rapidly to deal with the multitude of issues he has inherited and wish him success in stabilizing the business first, and then moving it ahead.”

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One issue Exstein is referring to is an impending liquidity crunch. This may be one reason why the bonds may be trading so low. J.C. Penney could burn $1 billion in cash this year, and it doesn’t have enough funding to support this spending, according to estimates from Piper Jaffray.

“While many questions remain up in the air, one thing is nearly certain: Investors should continue to expect JCP to burn a substantial amount of cash in 2013,” Alex Fuhrman of Piper Jaffray, said in a research note.

But longer-term debt investors may still find a deal in its bonds. The biggest hook is in J.C. Penney’s real estate. The company has more than 1,100 stores nationwide, and values its land and buildings at $4.9 billion, not including the furniture inside. Some of this may be its Dallas corporate headquarters — call it 15% just to be safe. That means that the real estate value of its stores could be $4.2 billion.

The company currently has $3 billion in debt. If it had to liquidate these real estate assets, the value would more than make creditors whole and also give about $6 to each shareholder, assuming it sold the assets for book value.

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This sounds like a pretty good deal. But equity investors may still want to sit on the sidelines. Even with the stock’s tumble Tuesday, shares are still at nearly $14. Stockholders are giving the retail business quite a bit of value, and it may never be worth much more than the current price. That may be one reason real estate company Vornado was recently said to be dumping its stake in J.C. Penney.

But bond investors might look at things another way. Several issues may be pushing bond prices artificially low. First, debt investors often become overly nervous when a liquidity crunch is on the horizon. Second, the share price has been above some stock analysts’ targets, which is never good for overall market psychology. Plus, the company may not be able to liquidate its entire real estate portfolio for the full value, especially if it is under pressure, and valuation uncertainty is never a good thing.

Some savvy real estate investors — or retail companies — may find J.C. Penney’s hard assets to be a gem. Bondholders would be the beneficiaries.

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