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JCP Sale Hearing on Track—But One Big Sticking Point Remains

There are still some “ifs” clouding the J. C. Penney bankruptcy case, but for now the sale hearing remains on track for Nov. 2.

JCP has filed its draft asset purchase agreement with Copper Retail JV LLC and Copper BidCo LLC, representing the OpCo and PropCo components, respectively, a Credit and Guaranty Agreement for related financing, a plan of reorganization and its disclosure statement.

As has been contemplated, the PropCo holding consists of 160 real estate assets in one real estate investment trust and its six distribution centers place into a second REIT, which will be owned by the company’s debtor-in-possession lender and first-lien lenders. The OpCo component to be owned by Copper Retail JV LLC is with JCP’s two largest landlords, Simon Property Group and Brookfield Asset Management.

The PropCo portion includes a credit bid from lenders and the assumption of PropCo liabilities, while the OpCo component for the retailer’s operating assets will be acquired through a combination of $692 million in cash, credit bid and new term loan debt, subject to adjustments. If JCP elects to go with another buyer after the final agreement is inked but before the deal closesa, the two landlords will be paid a $9 million break-up fee.

In a Tuesday court filing, the retailer said a sale would offer the chance to preserve more than 60,000 JCP jobs, in addition to other benefits. “Over 5,000 vendors will be positioned to maintain a valuable trade partner. Nearly 200 landlords will sustain their decades’ long relationship with J.C. Penney as a tenant,” the document read.

While there seem to be a few other issues to iron out before the parties can finalize the deal, one sticking point seems to be the Master Lease Agreement that will govern the PropCo-OpCo landlord-tenant relationship. That document remains subject to ongoing negotiations among the parties, the court document noted.

Another question mark is what happens with the competing proposal from the minority group of first-lien lenders. It appears that they are looking to bid for one portion of JCP’s assets, although the PropCo-OpCo bid is really one combined offer even if there are separate asset designations. And while the retailer is in talks with all interested parties, the likely scenario is for the still-to-be finalized asset purchase agreement to become the stalking-horse agreement, with the competing offer possibly a bid at auction. Or the parties could come to some other resolution that has the minority first-lien group receiving a bit more from the sale than what’s currently proposed.

However it gets resolved, JCP still has just two weeks to tie up loose ends before the Nov. 2 hearing.

As for the plan of reorganization, unsecured creditors are deemed to be holding impaired claims. While they can vote as a class on the plan, it’s unclear how much of a recovery, if any, they would get on their claims. Once a sale concludes, JCP would have new ownership, cease to be a publicly traded firm, and extinguish existing shareholders’ shares in the company.

If the sale hearing date proceeds as planned, followed by a confirmation hearing two or three weeks later, JCP has a shot of exiting Chapter 11 before Christmas.

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