The J. C. Penney's at Herald Square.

J.C. Penney will be sold as a going concern.

After a marathon hearing in Texas bankruptcy court on Monday that lasted close to 12 hours, U.S. Bankruptcy Judge David Jones approved the planned sale that the retailer has negotiated for months with Simon Property Group, Brookfield Property and a group of majority first-lien lenders.

The thrust of the lengthy hearing was whether the court should approve a sale that would keep the business alive, but leave its shareholders without recoveries. The retailer’s legal and financial advisers used the hearing to make a forceful case that the sale was its only hope for survival, and that if it didn’t materialize, a liquidation was all but certain. Now with the court’s approval, the sale is expected to close by Nov. 20. 

I tell everybody from the bottom of our heart, that we sympathize with so many people who stand to lose so much,” said J.C. Penney attorney Joshua Sussberg of Kirkland & Ellis LLP. “But, as your honor heard today, there is no other alternative.”

The Pension Benefit Guaranty Corp. has already said this month it would pay pension benefits for J.C. Penney Co. Inc. workers and retirees. But shareholders made their presence felt throughout Monday’s hearing, some staying on the call through their own work days, and even as they commuted home, fixed dinner and put their children to bed. Chapter 11 proceedings mean losses and diminished recoveries for unsecured creditors, but for shareholders, at the bottom of the hierarchy of who gets repaid, there are no recoveries to be had from this sale, they said. 

“I honestly believe, if we go down the path where the J.C. Penney reputation is put at stake by the shareholders getting nothing, I think that really is the true devastation to the company and I think…the public will remember this,” one shareholder said toward the end of the hearing, when Judge Jones made more time for shareholders to be heard in court.  

But Judge Jones appeared to concede to the reality before him, and said he would approve the sale.

“The evidence is overwhelming that everyone has looked at every viable option that could exist,” he said. “Everyone’s talked about, ‘they’re going to lose their equity, they’re going to lose their value,'” he added. “That simply is not true. Value is already gone. Value is gone long before today.”

Over the course of the all-day hearing, the company put forward its restructuring advisers and its chief financial officer as witnesses to persuade the court to overrule the objections of shareholders — who stand to be shut out of recoveries if the sale is approved. The shareholders have also disputed the retailer’s narrative about its finances and the necessity of the deal.

Penney’s advisers together outlined a dire picture of the company’s trajectory since it filed for Chapter 11 in May, and through the COVID-19 pandemic that caused nonessential retailers around the country to temporarily shut stores for several weeks. The company has more than $7 billion in outstanding claims, including $900 million in debtor-in-possession loans, on top of billions in secured loans in the form of an asset-based lending credit facility, and first- and second-lien loans, and roughly $1.6 billion in trade debt, Sussberg said. 

“We’ve gone into the marketplace, we have pursued any and all opportunities, and what we have before us is the result of economic reality,” Sussberg told the court Monday. “We have an unsustainable capital structure that precipitated the filing of these cases. Not to mention, it comes on the heels of the retail apocalypse and a global pandemic that nobody in their right mind thought could be continuing nine months to the very start. There is no end in sight.”

To firm up support for the deal before the hearing, Penney’s negotiated a settlement with a group of minority first-lien lenders who were previously objecting to the sale, as well as its creditors committee, which includes bondholders, trade vendors and others. 

The parties told the court that the deal was the only viable option for survival for the retailer, which already began shutting down some 156 locations through the bankruptcy, letting go of some 20,000 employees in the process. 

“While we started out with 80,000 employees, and much has been made about the fact that we’re down to 60,000 employees, this company utilized the tools inherent in the bankruptcy code…to facilitate what will be a vibrant going-concern business for many years to come,” Sussberg of Kirkland & Ellis LLP said. 

An attorney for the ad-hoc equity committee, which represents the interests of shareholders in the case, disputed the retailer’s version of events. Matthew Okin of Okin Adams LLP, who represents the ad-hoc committee of equity interest holders, argued that the company’s current time crunch was largely self-imposed, and the result of the control that its majority first-lien majority lenders, who went on to provide its DIP loans, exerted in the process. 

He argued that the deal before the court was engineered by the DIP lenders’ control over the process, all but ensuring their role in the sale agreement. The sale deal before the court, as reported in detail in recent months, involves splitting Penney’s into a retail business, or the Op Co., and a real estate one, or the Prop Co., which would own some 160 J.C. Penney retail locations, as well as six distribution centers. Those locations would be leased back to the Op Co. under a master lease agreement that the parties have negotiated for several weeks. Simon and Brookfield would run the Op Co., while the majority first-lien lenders would run the Prop Co. 

“We don’t relish the idea of opposing a sale that the parties claim would result, if it weren’t approved, would result in the liquidation of a 118-year-old store,” Okin told the court. 

“All of the problems that the debtors’ witnesses are going to tell you about today are a function of either the delay that has been caused by the negotiations that have gone on interminably in this case, or a function of the fact that the lenders have not allowed debtors to spend money as they should have during the case in order to keep vendors happy,” he said. 

The lengthy questioning throughout the afternoon unearthed more insight into the retailer’s sale marketing process. At one point, Okin argued to the court that one lender in the first-lien majority lender group had exerted pressure in the process. He suggested that H/2 Capital Partners had put some pressure on Saks Fifth Avenue’s parent company Hudson’s Bay Co., which earlier this summer had also submitted a bid for J.C. Penney’s retail business. 

But David Kurtz, the global head of restructuring at Lazard Frères & Co. LLC, an investment banker advising Penney’s, disputed that characterization. Kurtz testified in Monday’s hearing that Hudson’s Bay had stayed in the process until shortly before Penney’s ultimately decided to go with the Simon and Brookfield bid. 

Kurtz said he had indeed learned that in early August a lawyer at Hudson’s Bay’s outside law firm had heard from a lawyer purporting to rep H/2, allegedly stating that H/2’s support in connection with a potential transaction with J.C. Penney would be contingent on resolving a separate issue between HBC and H/2, according to Kurtz’s account of what he had learned at the time. But Kurtz said that didn’t ultimately affect Hudson’s Bay’s role the discussions, and the company stayed involved until around the end of August. 

Kurtz said private equity firm Sycamore, another one of the three bidders for Penney’s retail business, was also “very actively” participating in the process, and that he was in regular discussions with its chief executive officer on the possibility of an agreement. But ultimately, it was Simon and Brookfield that prevailed because they were prepared by August to put forward a $300 million equity check on the table, he said. 

“That was a significant amount of money that they were prepared to step up and provide,” Kurtz said. “By the middle of August, it was clear that was not the case with Sycamore and Hudson’s Bay.” 

Both Sycamore and Hudson’s Bay were more interested in potentially being hired by the lenders to manage Op Co. on their behalf for a fee, he said. 

James Mesterharm, managing director at AlixPartners LLP and restructuring adviser for Penney’s, meanwhile testified that the retailer’s relationship with its vendors had grown strained during the bankruptcy.  

“Chapter 11 is not a healthy place for companies to stay,” he said. “It’s a costly process, it’s a process where because of the uncertainties about the potential outcome of the case…it creates particular hardship on vendors, it creates concern in the mind of customers, employees, and it is not a place where people go by choice.”

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