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Penney’s Options Drying Up, What’s Next?

Unable to get a deal done with three potential bidders for the operating company of bankrupt J.C. Penney Co. Inc., lenders are looking at a credit bid for the retailer.

“We are going to do everything humanly possible to ensure [J.C. Penney] will be around for the foreseeable future,” Joshua Sussberg, the retailers’ attorney at Kirland & Ellis, told U.S. Bankruptcy Judge David Jones on Monday.

He said the plan contemplates an “Opco-Propco structure,” in which 160 company-owned properties would be contributed to a real estate investment trust, with a second REIT created to hold the distribution centers, along with the set up of a third entity called Opco to hold the operating business.

While three groups have been in talks to buy the operating entity, Sussberg noted negotiating egos and posturing have been an issue. He also emphasized to Judge Jones that the company is aware that “thousands of jobs and the very essence of the company’s infrastructure are at risk,” as well as the company’s vendors who are on standby and holding inventory waiting to find out what will happen in the case.

“Notwithstanding the stalemate, the DIP and first-lien lenders are dedicated to supporting [J.C. Penney],” Sussberg said. “Our lenders are not going to be held hostage in negotiations with third parties [and will] credit bid” to own the company. It’s a move that the attorney said will save 70,000 jobs at the company and help its vendor base.

Sussberg also said the company will file bidding procedures and an asset purchase agreement, and will do so over the next 10 days.  In essence, those documents will put in place a stand-alone plan for the retailer, and allow a sale to go through within 30 days. “The need for speed cannot be overstated. There is a tremendous amount of work over the next 10 days,” Sussberg said.

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While Sussberg noted how time is running out for the mass merchant, he also emphasized that the company and its lenders are working to keep the company operating as a going concern.

“This company is willing to do whatever it takes to get this deal over the goal line. Time is not our friend—it is far from it,” the lawyer said.

He also said some locations were removed from the store closings list while negotiations were ongoing with landlords, and said those doors will be closed promptly.

With an asset purchase agreement in place along with bidding procedures, there is a chance that the potential bidders might come back with a bid at auction. If that happens and an offer is accepted, the winning bidder for the operating company would then take the place of the lenders in Opco component of the reorganization structure.

Whether other bids will be forthcoming is up for debate. An attorney for the lenders said, “We are exploring all our alternatives. The bidders have been a disappointment.”

That aligns with what Sussberg said about negotiating egos and posturing.

The three reported bidders are private equity firm Sycamore Partners,  Hudson’s Bay Co. CEO Richard Baker and a joint venture between landlords Simon Property Group and Brookfield Property Partners. It was the joint venture between the landlords that was said in recent weeks to have had the inside track. Negotiations also were said to have dragged on while Penney’s and the landlords were in talks over a restructuring of some lease terms. Sources said Penney’s has not paid rent, and that could be why it has been able to accumulate $1.48 billion in cash and cash equivalents, as of its July monthly sales report.

But there could be another issue in play as well. When the talks with the landlords were in earnest, Penney’s had forged a tentative agreement with first-lien lenders on a workable business plan, and the company had posted an unexpected surprise—$47 million in net income for the month ended July 4. That profit instead of a loss gave hope that the retailer might be turning the corner with positive sales trends.

But four weeks later, the tide turned and for the month of July Penney’s ended back in the red. The net loss was $266 million. That suggested that the June sales report was boosted by federal stimulus payments, not that consumers were ready to head back to Penney’s to buy on a regular basis. And if July sales were tumbling, it could easily give bidders a reason for pause.

With concerns about job losses, Sussberg emphasized to Judge Jones: “I want to assure the court and everyone in this case that we will confirm a plan [of reorganization].”

Penney’s filed its Chapter 11 petition on May 15.