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JC Penney sale, plan confirmation hearings set amid growing lender strife

A hearing to approve J. C. Penney Co. Inc.'s proposed asset sale to lenders under the company's debtor-in-possession facility and a venture formed by Simon Property Group and Brookfield Property Group appears on track for Nov. 2, despite efforts by a group holding a minority of the company's pre-petition first-lien claims to delay the sale process.

At an Oct. 26 status conference on the case, Houston Bankruptcy Court Judge David Jones also conditionally approved the company's disclosure statement, clearing the way for a creditor vote on the company's reorganization plan, and formally scheduled a reorganization plan confirmation hearing for Nov. 24.

As reported, the company is seeking approval of a deal backed by the debtor-in-possession, or DIP, lenders (who also hold a majority of the company's first-lien debt) under which the company's assets would be sold in two related transactions. Under one transaction, the Simon/Brookfield venture would acquire the company's retail operations for a combination of cash, a credit bid of certain transferred DIP and first-lien debt claims, and $520 million of take-back debt. The precise mix of the bid's cash and credit bid claim components is unclear, according to documents filed in the Chapter 11 case, but the total value of the bid is estimated at about $800 million.

The second transaction would be the sale of the company's real property in exchange for a $1 billion credit bid comprising the company's $900 million DIP and $100 million of first-lien debt, less whatever is assigned to the Simon/Brookfield venture. The real property would be reorganized into two real estate investment trusts and leased to the Simon/Brookfield operating company pursuant to a master lease agreement, which is currently being finalized.

That proposal has come under fire from the minority first-lien group, which has argued that the transaction is structured, in effect, to transfer 90% of the company's value — an amount exceeding $1.6 billion — to DIP lenders in exchange for their $900 million portion of the credit bid, leaving a scant 10% of the company's value for pre-petition first-lien lenders, the company's senior creditors.

The minority group contends the deal would leave DIP lenders with a recovery of about 160%, while the company's pre-petition first-lien lenders would recover only about 10% of their claims. That estimate may have been optimistic — according to the company's amended disclosure statement filed Oct. 26, first-lien lenders would recover between 0% and 6.4% of their claims, depending on the extent to which claims are assigned to the Simon/Brookfield venture for the credit bid portion of their bid.

As reported, the minority group has submitted a rival $750 million cash bid for the company's real property assets. The minority group's proposal contemplates the completion of the operating company assets to the Simon/Brookfield venture, but an alternate distribution of the company's value once the transactions are completed.

The minority group contends that the structure of its transaction would allow the company to pay off the DIP in cash and return some $724 million of value to first-lien creditors, consisting of the $520 million in take-back debt and $204 million of excess cash after the payment of the DIP and the company's pre-petition ABL, resulting in a 46% recovery.

The minority group had asked Jones to delay a Nov. 2 hearing to approve the sale, saying that the company had not responded to its offer, and arguing that the allegedly superior creditor returns of its offer would preclude confirmation of a reorganization plan based on the DIP lender credit bid.

The minority group argued that the Simon/Brookfield portion of the transaction could move forward, leaving the two lender groups to litigate their respective proposals at the plan confirmation hearing.

But according to a report of the Oct. 26 status conference from Women's Wear Daily, attorneys for the company and the DIP/majority first-lien group argued that the sale transaction is a single transaction in which parties could not be interchanged. The WWD report said that the sale hearing remains set for Nov. 2, although the issues giving rise to the minority group's objections remain pending.

For his part, Jones has made clear that a priority for him is seeing the company sold in a going-concern transaction that preserves the company's 60,000-plus jobs. In this regard, Jones has also said he would like to see a sale completed and a plan confirmed in time for the holiday shopping season, which traditionally begins on Black Friday, the day after Thanksgiving (which this year falls on Nov. 27), in order to give the company's vendors confidence that the company would survive.