J.C. Penney is still negotiating its planned sale to a group of first-lien lenders and landlords Simon Property Group and Brookfield Property, in a process that continues to drag on as key dates loom this week.
In a regulatory filing on Wednesday, the retailer wrote that it is still “in discussions regarding the transactions contemplated by the [letter of intent]” between the company, a group of majority first-lien lenders as well as Simon and Brookfield.
The retailer’s update marks the latest in a series of apparent delays in the case, and especially since the parties filed the Sept. 10 letter of intent, a non-binding document outlining a potential sale deal as part of J.C. Penney’s bankruptcy restructuring process to sustain the company as a going concern.
The delays also highlight the complexity of the contemplated sale, and the public nature of a deal process in the context of bankruptcy proceedings, where deadlines are driven by lenders and each step forward requires documentation and court approval.
“The terms of any potential transaction are subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the bankruptcy court,” the retailer wrote Wednesday in its 8-k filing with the U.S. Securities and Exchange Commission.
Representatives for J.C. Penney, Simon and Brookfield, and an attorney for the lender group in the sale did not comment Wednesday.
Penney’s advisers have emphasized in court appearances and filings so far that the parties’ stated goal is ultimately to preserve the retailer as a going concern business and retain some 70,000 employees.
To that end, Texas bankruptcy Judge David Jones approved a timeline in the proceedings last week that would have the retailer cement its sale talks and file a number of documents by this Friday, including a sale motion, an asset purchase agreement, a disclosure statement and a Chapter 11 plan.
The court also scheduled a hearing next week on Oct. 20 to consider details of the deal, and potentially grant conditional approvals that would set the final steps of the retailer’s reorganization in motion.
At this point in the process, certain nondisclosure agreements related to sale discussions have lapsed, which allowed the retailer to post certain financial projections for its operations from Oct. 4 to Jan. 2, 2021, along with its 8-k filing on Wednesday.
For the 13-week period the projections encompass up to January 2021, they forecast a net cash flow of $384 million, as well as projected expenses including $108 million in debt service and fees for the duration, as well as $66 million in disbursements to restructuring professionals during that time.
Those projections are not actual company financials — rather, they are ones that were made as part of sale discussions, according to the filing. But such numbers can offer some sense of the company’s finances to other interested parties in the case, bankruptcy attorneys said.
“Bankruptcy is generally a transparent process,” said Patrick Collins, bankruptcy and restructuring partner at Farrell Fritz PC, who is not involved in the J.C. Penney case, and spoke generally.
“If it’s about the bankrupt company, it’s going to be public in some shape or form eventually, because bankruptcy is all about disclosure of the financial condition of the company,” he said. “The projections are of interest to parties interested in putting in a bid [who] want to know what the projected performance, perhaps by a store [for example], will be.”
So far, a group of minority first-lien lenders has raised its objections to the planned sale, saying the terms appear to favor the majority group of first-lien lenders over other creditors in the process. The minority group has indicated plans to submit a counter-offer, which it is expected to discuss at a hearing in the case scheduled for Oct. 20.
The court has also set timelines for some of the final steps in the process, with a sale hearing scheduled for Nov. 2 and Chapter 11 plan hearings scheduled for Nov. 24 and 25.
Courts generally assess sale agreements with an inclination to trust companies’ judgment of their finances and options for survival, bankruptcy experts said. Unless the court observes signs that the process did not involve arms-length negotiations, or sees some other issue with the negotiations, it tends to support outcomes that keep the company alive.
“When you’re talking about a bankruptcy sale, there’s a degree of deference to the debtor, as far as whom to sell it to and how much to sell it for,” said Mark Bogdanowicz of Howard & Howard Attorneys PLLC. Bogdanowicz did not comment on the J.C. Penney case and spoke generally.
“It’s basically a business judgment standard, and what that means is, as long as the debtors have come forward with a legitimate business reason for supporting the transaction, then that won’t be second guessed by the courts,” Bogdanowicz said.