J.C. Penney’s debt holders prepare a last-minute rival bid for its real estate

J.C. Penney’s lenders are battling over the company’s real estate and their potential payback while the department store retailer needs an end in sight to its bankruptcy as the holiday shopping season looms.



a sign above a store: The J.C. Penney store at Stonebriar Centre in Frisco, Texas.


© Louis DeLuca/Dallas Morning News/TNS
The J.C. Penney store at Stonebriar Centre in Frisco, Texas.

Penney is close to having a solution that keeps alive the 118-year-old business and saves 70,000 jobs, but there’s no firm plan yet filed with the court.

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Deadlines continue to be missed, casting doubt with the retailer’s vendors who in some cases are holding back shipments of merchandise that Penney would need if it’s going to have a productive holiday season.

U.S. Bankruptcy Court Judge David Jones set some firm dates at a hearing on Wednesday to force everyone’s hand and calm suppliers that Penney will survive.

Debt holders led by Aurelius Capital Management plan to file a bid for six distribution centers and 161 Penney stores by Oct. 20 after reviewing a proposed offer from Penney’s secured lenders led H/2 Capital Partners that hasn’t yet been made public.

The details of the H/2 offer will be filed by Oct. 16 along with Penney’s business plan, said Penney’s lawyer Josh Sussberg of Kirkland & Ellis.

The group led by H/2 would swap $900 million in debt for ownership of the real estate and the retailer would enter into a master lease to rent those properties back for $156 million a year.

The Aurelius led group said in a filing on Monday that the existing offer “appears to grossly undervalue” Penney’s real estate to “deliver oversized recoveries” to the secured lenders at the expense of the other stakeholders of the bankruptcy.

There’s a non-binding letter of intent from the two largest U.S. mall operators, Simon Property Group and Brookfield Property Group, to buy the retail operating company and keep the business going.

So far, Sussberg has presented the proposed sale of the operating company and its real estate as something that had to happen together.

Philip Dublin of Akin Gump Strauss Hauer & Feld said there should be a bidding process and added that it wouldn’t matter to Simon and Brookfield who owns the stores Penney would be renting. In the end, it will likely be a publicly-traded real estate investment trust that owns the property, he said.

The debt holders aren’t alone in challenging the values assigned to Penney in the proposed sale.

An ad hoc committee of Penney’s equity holders presented their case that Penney’s value is sufficient to include money for shareholders. Some have argued that Penney didn’t even need to file bankruptcy pointing to its current level of cash: $1.4 billion. Sussberg said that’s because Penney hasn’t received and paid for merchandise.

“I’ve seen too many retail cases in 30 years to know that the longer the case goes on, the worse it is,” Judge Jones said. “Black Friday is coming.”

He dangled one more motivating prospect of interrupting everyone’s Thanksgiving plans. He cleared his calendar for Nov. 24 and 25, the Tuesday and Wednesday before Thanksgiving, to be used if necessary to get Penney’s plan of reorganization confirmed.

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