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J.C. Penney Revs Up for Sale as Lender Faction Looks to Join Fray
October 7, 2020
J.C. Penney has now marked out a finish line to dash toward as it attempts to finalize a going-concern sale to landlords Simon Property Group and Brookfield Property and a majority group of first lien lenders.
At a hearing Wednesday in Texas bankruptcy court, where the case began in mid-May, U.S. Bankruptcy Judge David Jones approved a timeline that puts the retailer on a path to a sale hearing on Nov. 2, and a Chapter 11 confirmation plan hearing on Nov. 24 and Nov. 25. The timeline would allow a first lien minority group, which has argued that the power dynamics in the case have undercut its interests, to craft its own bid to join the sale process.
At Wednesday’s hearing, Joshua Sussberg, a partner at Kirkland & Ellis LLP representing J.C. Penney, made the case for the urgency of the sale process at this point in the bankruptcy. As the company heads into the holiday season, vendors have pulled back over concerns about whether a sale will still materialize, he told the court.
“And this is the time of year where we acquire most all of our goods,” Sussberg said at the hearing.
“The public nature has made it easy for the vendor community to follow the milestones,” he said. “And admittedly, we are getting good at missing deadlines. And while vendors are supportive of the direction we are heading, many are waiting for a binding deal and closure to fully support, or resume supporting the company.”
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The timings set a concrete pace for the retailer to finalize negotiations, since it first revealed a tentative deal with the landlord and lender group almost a month ago, in the form of a nonbinding letter of intent.
Under the schedule approved Wednesday, J.C. Penney will file a sale motion and an asset purchase agreement on Oct. 16, as well as a disclosure statement and a Chapter 11 plan on that day.
The following week, Jones will hold a hearing to consider a conditional approval of the disclosure statement, which, if he grants it, will allow the retailer to send out its plan to creditors to solicit their votes for its confirmation plan. The first lien minority group, which filed an objection in the case Monday, will also have the opportunity to flag its concerns and discuss a counterbid at that hearing.
The conflict between the majority and minority first lien lender groups hinges partly on the complexity of the proposed sale and reorganization, which establishes a divided J.C. Penney operating company that would hold its retail operations and other assets, and a property business that would include some 160 Penney’s properties that would be put into a public real estate investment trust, as well as distribution centers.
J.C. Penney’s proposed sale includes Simon and Brookfield’s bid for the operating company, or Op Co., as the retailer’s advisers refer to it, along with a credit bid by a majority group of first lien lenders for overall enterprise including the property business, or the Prop Co.
The first lien minority group has said it supports Simon and Brookfield’s bid for the Op Co., and that it objects only to the first lien majority lenders’ credit bid, and seeks to enter a counterbid to their portions of the deal.
“We all appreciate what’s at stake with this company and nobody wants to see this company fail,” said Philip Dublin, partner at Akin Gump Strauss Hauer & Feld LLP, who represents the first lien minority group.
“Everybody wants to see Brookfield and Simon acquire the operating business, everybody wants to see the 70,000 jobs saved,” he said, referring to J.C. Penney’s employees.
The majority first lien group involved in Penney’s proposed sale include the funds Ares, Brigade, H/2 Capital Partners, Silver Point, KKR, Sculptor Capital, Sixth Street Partners, White Box, Owl Creek and Apollo. The objecting first lien minority lenders include Aurelius Capital Management LP, Bank of America, N.A., and Credit Suisse Loan Funding LLC among others.
On Wednesday, Sussberg argued that the bar to compete with the proposed sale transaction would be high, and said that despite its different moving parts, the deal represents a single “integrated and divisible” bid.
The first lien majority group has significant leverage in the process, given the finances in the case of the retailer’s secured loans. J.C. Penney has a $900 million debtor-in-possession financing facility, as well as roughly $1.57 billion in first lien debt obligations. Competing offers to its current sale proposal should be able to clear the $2.47 billion sum of those claims, Sussberg argued.
The majority group also represents 94 percent of the $900 million DIP claims, and about 75 percent of all first lien indebtedness claims, while the minority group only represents 5.6 percent of the DIP claims, and about 19.6 percent of all first lien indebtedness, Sussberg said.
Jones signaled he would make room to hear the minority group’s concerns about the deal once the retailer files more documents next week outlining the details of the agreement. But he mused also that that the proposed deal before him was the only one so far to offer the retailer a chance at survival.
“I don’t know whether this transaction is the right transaction or not,” he said at the hearing. “I haven’t been able to test it, I can’t even read it at this point, because I don’t know all the details, and it’s my view that that’s where the meat of this is going to be. But it is the only deal I have at this point where I have someone standing up saying, ‘Here is a path.’”