J.C. Penney Faces Challenge to Sale Process as Bankruptcy Draws On

J.C. Penney Co. Inc., nearly five months into Chapter 11, is still trying to pin down its planned going concern sale to landlords Simon Property Group and Brookfield Property and a primary group of lenders who hold the majority of the retailer’s first-lien debt.

But a conflict between disputing factions of first-lien lenders is posing a hurdle ahead of a bankruptcy court hearing on Wednesday meant to set timelines for a sale this month.

In a filing in Texas bankruptcy court on Monday, a group of first-lien minority lenders — including Aurelius Capital Management LP, Bank of America NA and Credit Suisse Loan Funding LLC, among others — claimed the retailer and the majority group of first-lien lenders involved in the process are trying to fast-track a sale process that would primarily benefit those first-lien lenders, at the expense of the minority group.

The minority group’s objection targets only the main first-lien lender group’s role in the planned sale, and not that of landlords Simon and Brookfield. That split reflects the complexity of a proposed sale process that involves a reorganized, split entity and, in turn, the pieces of the sale puzzle.

“The first-lien minority group has no objection to the Brookfield/Simon bid and supports the debtors’ efforts to consummate the OpCo. transaction as soon as possible to ensure J.C. Penney continues as a going concern and thousands of jobs are saved,” the objecting group said in its filing, alluding to the so-called Prop Co./Op Co. structure that the retailer’s advisers have described in explaining its planned reorganization that would divide its property business from its operating company.

The “Prop Co.,” its property business, would include 160 Penney’s properties that would be put into a public real estate investment trust, and its distribution centers that would be put into another REIT. Meanwhile, the operating company would hold its retail business as well as assets including intellectual property. This Op Co. would lease properties under a master lease agreement with the property companies, according to the retailer.

The proposed sale deal, which Penney’s attorneys outlined in court last month, contemplated a $1.75 billion price tag comprising a $300 million equity check from Brookfield and Simon, $500 million of financing from the retailer’s current debtor-in-possession and first-lien lenders, and new debt.

But given the Prop Co./Op Co. split, the sale process itself involves different components, the first-lien minority group said in its filing. The Brookfield/Simon bid for the operating companies, as well as a separate credit bid for the entire business by the debtor-in-possession lender group of roughly $1 billion, which includes $900 million in DIP loans and a $100 million price tag for first-lien loans, according to its filing.

The main group of first-lien lenders behind the credit bid together hold the majority of the retailer’s first-lien debt, and include the funds Ares, Brigade, H/2 Capital Partners, Silver Point, KKR, Sculptor Capital, Sixth Street Partners, White Box, Owl Creek and Apollo.

The first-lien minority group argued in its filing Monday that it “objects to the structure of the credit bid, which has been designed to enrich the DIP Lender Group,” and that their credit bid “appears to grossly undervalue the Debtors’ assets in order to deliver outsized recoveries to the members of the DIP lender group and to the detriment of first-lien creditors.”

J.C. Penney has sought to establish deadlines for the planned sale. In recent court filings, the retailer indicated plans to ask the Texas bankruptcy court overseeing the case on Wednesday to set deadlines this month to approve a disclosure statement and stalking horse asset purchase agreement, and set a date for a potential auction, if there are any rival bids.

A representative for J.C. Penney did not comment on the first-lien minority group’s objection.

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