J.C. Penney Heads Toward Sale Hearing – WWD

J.C. Penney laid more bricks in its planned sale to Simon Property Group, Brookfield Property and a group of majority first-lien lenders. 

The retailer told a Texas bankruptcy court at a hearing on Monday that it has pinned down business terms in a lease agreement that is central to the going-concern sale deal, and that it will document the agreement in the coming days. 

The parties wrangled the deal on the so-called master lease agreement, through the course of their ongoing mediation process to move negotiations forward as the bankruptcy enters its sixth month and draws closer to an upcoming sale and Chapter 11 confirmation dates in the case. 

On Monday, J.C. Penney attorney Joshua Sussberg of Kirkland & Ellis LLP told the court that the retailer’s board has met throughout the case, including last week and Monday morning to discuss the company’s viable next step. The board sees only one path ahead. 

“The board, and we all as professionals, are focused on maximizing the value of this enterprise,” Sussberg said. “Under these circumstances, that means one thing, and one thing only: achieving a going-concern transaction. A going-concern transaction saves 60,000 jobs, ensures an adequately capitalized tenant for many landlords, and a trade partner for hundreds of trade counterparties.

“No one can seriously question or challenge that a going concern is more valuable than a wholly uncertain liquidation,” he said. “It would be a liquidation during a global pandemic, with speculative values for the company’s vast real estate portfolio, in the face of what has been known as the retail apocalypse.”

The remarks alluded to mounting opposition by a group of minority first-lien lenders who oppose aspects of the deal involving the majority first-lien group. At Monday’s bankruptcy court hearing before Judge David Jones, attorneys for the majority and minority lender groups reprised their respective arguments about the next steps in the case. 

Specifically, the first-lien minority group, comprising Aurelius Capital Management LP, Bank of America N.A. and others, are objecting to a $1 billion credit bid by the first-lien majority lender group, which includes investment companies including H/2 Capital Partners and Brigade. The minority group has been arguing that the majority group, who have also provided most of the debtor-in-possession financing for the retailer’s bankruptcy, have negotiated an agreement that skews the deal’s value in its favor. 

Earlier this month, the minority group submitted its counterproposal to the first lien-lenders’ credit bid, but J.C. Penney has indicated it doesn’t believe the minority group’s offer is actionable. The dispute continues to simmer as the parties head toward a sale hearing scheduled for Nov. 2. 

“The debtor has never explained the structure of the transaction that you’re going to be asked to approve on Nov. 2… and neither has the [first-lien majority lender] group,” Philip Dublin of Akin Gump Strauss Hauer & Feld LLP, who represents the minority  group, told the court. 

“They have never explained exactly how they are seeking to implement this transaction,” he said. 

The dispute over the minority group’s counterproposal is nuanced and speaks to some of the common dispute dynamics between different tiers of lenders in a bankruptcy, as well as the complexity of the planned J.C. Penney sale itself. 

Both J.C. Penney and the majority lenders told the court Monday, as they have in recent hearings, that the planned going-concern sale to the Simon and Brookfield landlords and the majority group is a combined transaction that cannot be split or replaced with other parties.  

As previously reported, J.C. Penney’s planned sale would involve dividing the business into a retail operating business, or Op Co., that the Simon and Brookfield landlords would take over, and a real estate business called the Prop Co. The master lease agreement would allow the landlords to lease locations from the Prop Co. The majority lenders’ credit bid goes toward that Prop Co.

The minority lenders’ bid is meant to compete with just the majority group’s bid, and not that of Simon and Brookfield, which the minority group doesn’t object to.  

But attorneys for J.C. Penney and the first-lien lenders have told the court that the planned deal cannot be split that way. 

Andrew Leblanc of Milbank LLP, who represents the majority lender group, told the court Monday that the majority lenders are allowed to control the size of their credit bid, and that there’s nothing untoward about how they’ve treated other lender groups in the process.  

“There’s no obligation, legally, morally, ethically, for us to bid any more than we have to prevail at the auction, that’s just the fact,” he said. “What we are doing, your honor, here, is trying to preserve this company as a going concern. 

“It may well be that if we liquidated this company, all of the first-lien lenders would get a better recovery,” he said. “But the debtors have made the choice that that is not the decision that they want to engage in for their enterprise, and we have accepted that.”