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New Twist in JCP Bankruptcy Saga

Is a rival bid coming in the J. C. Penney bankruptcy?

A group of lenders entangled in the department store chain’s nearly five-month-old Chapter 11 court case isn’t happy with how the retailer plans to carve out who gets what from its proposed sale—and might jump into the fray with a competing bid of its own.

Led by Aurelius Capital Management, the lender group has been vocal in criticizing the three-pronged post-bankruptcy plan under proposal. The strategy would create two real estate investment trusts owned by a larger group of lenders—one for 161 stores and the other to hold JCP’s distribution centers—and a third operating component controlled by the company’s two largest landlords, Simon Property Group and Brookfield Property Partners. Not surprisingly, the lender group’s chief takes umbrage with the so-called Prop Co./Op Co. proposal parceling out the majority of the proceeds to the bigger lending group, led by H/2 Capital Partners LLC, at the expense of all of the retailer’s lenders.

JCP, which filed for bankruptcy on May 15, has a $900 million debtor-in-possession financing facility and about $1.57 billion in first-lien debt. The group led by H/2 holds roughly 94 percent of the DIP claims and 75 percent of first-lien indebtedness. In comparison, the smaller group led by Aurelius hold just 5.6 percent of the DIP claims and 19.6 percent of first-lien indebtedness.

The proposed Prop Co./Op Co. plan, which includes a credit bid, led by H/2 is valued at $1.75 billion, with the landlords contributing $300 million. Under the proposal, the Aurelius-led group would capture just 10 percent of sale proceeds if that transaction goes forward.

However, it’s taking issue neither with the plan’s Op Co. component, nor its sale to the two landlords.

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In a court hearing Wednesday, Bankruptcy Judge David Jones responded, “I want to see what your folks can do,” when the Aurelius-led group aired its intent to cobble together a bid.

But the group faces a nine-day deadline of Oct. 16, the date by which the current plan is supposed to be approved. And even though that non-binding deal was agreed to in principle nearly one month ago, it still hasn’t been finalized into a definitive asset purchase agreement.

There’s another hurdle, too: Aurelius-led group would have to come up with $2.47 billion, a sum that would satisfy the $900 million in DIP claims and $1.57 billion in first-lien debt obligations, both of which the existing offer would cover.

The one bit of good news is that Judge Jones has set the sale hearing for Nov. 2, and a Chapter 11 hearing to confirm the reorganization plan on Nov. 24-25. Presuming all goes well, JCP would be poised to exit Chapter 11 proceedings in December. Those dates should help the retailer and vendors see some light at the end of the tunnel, and provide much-needed vendor support as JCP heads into the holidays.

JCP’s attorney acknowledged that some vendors have been hesitant to work with the chain over concerns about its bill-paying ability and fears that a sale might not come to fruition. Joshua Sussberg from Kirkland & Ellis noted that JCP has missed some deadlines, and that “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.”