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Hail-Mary Save Could Spring JCP from Bankruptcy in October

J. C. Penney got its Hail Mary after all.

Penney’s bankruptcy attorney Joshua Sussberg of Kirkland & Ellis told bankruptcy judge David Jones that the company was in a position to move the process to the end zone, namely reaching a deal with its two biggest landlords, Simon Property Group and Brookfield Property Partners.

Though the two mall operators were presumed to have the inside track on the Penney’s bankruptcy case that began on May 15, talks apparently stalled last month. Now, a letter of intent values the Penney’s enterprise at $1.75 billion. The company would be split into three parts, including a real estate investment trust holding 161 owned properties, a REIT holding the distribution centers, and Opco, which consists of the operating company that would be owned by Simon and Brookfield. The Simon and Brookfield venture will provide an equity check valued at $300 million for their share in the total enterprise, and take on about $500 million in debt. The two REITs would be owned by JCP’s lenders and be subject to a master lease agreement, meaning that while Simon and Brookfield will own many of the nearly 500 of JCP’s store locations, they will now have to pay rent to the lender-owners of the two new REITs for the 161 stores and DCs. Simon and Broofield will also pay rent on other store locations in the operating company that’s owned by other mall operators.

Exit financing from JCP’s existing lenders including hedge funds and private equity firms and its debtor-in-possession lender total $500 million. The company will also have a commitment from Wells Fargo for a $2 billion asset-based loan. There is also another first-in-last-out component of the ABL in the amount of $10 million. Combined, JCP, after paying back certain obligations, should have about $1 billion at close, Sussberg said.

A letter of intent still needs to be filed with the court, which Sussberg said should happen late Wednesday. Over the course of the next 10 days, Sussberg said the plan would be to convert the letter of intent into an asset purchase agreement. Penney’s also still needs to file a disclosure statement and a plan of reorganization based on the contemplated transaction.

Sussberg said the company and the different groups plan to move with lightning speed and seek approval of the transaction in early October, paving the way for JCP to exit Chapter 11 a week or so later once the deal closes.

“We have determined that an agreement with Brookfield and Simon, as well as the formation of separate real estate investment trusts owned by our first-lien lenders, is the best path forward to maximize value for our stakeholders, ensure we keep the most stores open and associates employed, and position JCPenney to build on our over 100-year history,” Jill Soltau, JCP’s CEO, said.

The company said once the asset purchase agreement is inked and binding on all parties, JCP will file with the bankruptcy court a motion setting out bidding procedures for a court auction, and Simon, Brookfield and the first-lien lenders serving as the “stalking-horse bider.”  JCP further said, “It is anticipated that the company will complete the auction and emerge from the court-supervised process operating under the JCPenney banner in advance of the 2020 holiday season.” Of course, an auction always raises the possibility, however slight, that someone else might want to come in make a higher offer. Although, given how long it took JCP to get to this point in the sale process, the chances of that happening could be slim indeed.

Given the store closures already taking place, JCP would exit Chapter 11 with about 650 stores in operation. The deal with its hedge funds and private equity firm creditors would eliminate a portion of JCP’s $5 billion debt load, and they in turn would own the two REIT components of the transaction.

Simon has rescued several of its mall tenants, including Aérospostale, Forever 21, Lucky Brand Dungarees and Brooks Brothers. Brookfield earlier this year said it would earmark $5 billion for investments designed to help ailing and distressed retailers struggling in the aftermath of the coronavirus pandemic.

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