JC Penney sale approved by bankruptcy court, giving retailer a second chance

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JC Penney is on track to emerge from bankruptcy by Thanksgiving, defying naysayers who thought the 118-year-old company was headed for the department store graveyard.

At the end of a 10 a.m. hearing on Monday to consider and exhaust all other Penney prospects, U.S. Bankruptcy Court Judge David Jones approved the sale of the Plano-based retailer to its two largest owners and to its main lenders.

Ultimately, the court decided that Penney still had value to its owners, vendors, and employees. He has a chance to recover from the pandemic and try to serve middle-income American households again. Penney will exit in an uncertain environment altered by the pandemic on top of centuries-old changes that were already rapidly transforming retail, but the only other alternative to a sale was liquidation, the court found.

The judge approved the sale of Penney’s retail business to Simon Property Group and Brookfield Property Group for $300 million in cash and the assumption of a new $500 million term loan. Penney will have $50 million in cash and the proceeds of a new $1 billion asset-backed loan for a total acquisition value of $1.75 billion.

While Penney will take on new debt, the reorganization will erase about $5 billion in debt it had when it filed for Chapter 11. The company will emerge from bankruptcy later this month with nearly 700 stores. Separately, 160 stores and six distribution centers owned by Penney will be transferred to senior lenders led by H/2 Capital to repay debt. Penney will pay an annual rent of about $156 million for the properties he previously owned.

After many delays, the decision fell on the wire. Penney’s financing agreement expires Nov. 16, and the sale must close by Nov. 20 to avoid liquidation.

“The evidence is overwhelming,” the judge said Monday evening, adding that he can only apply the law and cannot create value for classes of creditors where there is none.

The value of publicly traded investments in Penney had disappeared long before Monday’s hearing, Jones said. The plan eliminates bondholders, vendors, landlords, some benefits for uninsured retirees and shareholders from a potential payout, but it saves 60,000 jobs and a company to do business with in the future.

Shareholders and bondholders had their day in court on Monday in a hearing that ended at 9 p.m. Jones, who throughout the case has been respectful of Penney shareholders, many of whom are also retirees, allowed several witnesses to testify to consider a proposal that averted a sale and allowed Penney to emerge as such. it was.

But this would require the cancellation of the debt agreements concluded after Penney has filed for bankruptcy May 15. It’s a path that hasn’t been attempted, and such a move would have a huge impact on the ability of other businesses to obtain financing to use in a bankruptcy reorganization, Penney’s lawyers argued.

The principal witness for the shareholder, based in Dallas restructuring adviser William Snyder, said his analysis showed that Penney did not even need the financing that was now forcing its sale.

Most of the witness interviews during the lengthy hearing were conducted by Penney’s attorney, Michael Slade of Kirkland & Ellis, and Matthew Okin of Dallas-based Okin Adams, who represented Penney shareholders.

Penney’s investment banker, David Kurtz of Lazard, described the sale process and convinced the judge that after 100 parties initially reviewed the retail chain, no one was willing to pay more for Penney .

Simon and Brookfield’s purchase of Penney was “a defensive move” because they wanted to keep Penney stores open in their malls, Kurtz said. The two mall owners own approximately 161 Penney stores. Penney will emerge from bankruptcy operating nearly 700 stores.

Penney’s chief financial officer Bill Wafford testified to the urgency of securing a deal. Penney not only lacked shipments of goods from finicky vendors, but employee turnover was higher and hiring new employees took longer during the bankruptcy.

Penney went bankrupt with 85,000 employees, but downsizing due to the closure of 156 stores and a dismissal this summer in the Plano company office leaves 60,000 jobs.

Attrition is also evident in Penney’s defined benefit pension plan, which had 52,000 members last year and now has 36,000 current and future retirees. The decline in plan membership over time was primarily due to Penney purchasing annuities for retirees and others opting out of the plan by taking a lump sum.

Friday, Penney completed a report previously decision to end his defined pension plan. Pension Benefit Guaranty Corp. will support the plan.

PBGC estimates that JC Penney’s plan is 92% funded with approximately $3.3 billion in assets and approximately $3.6 billion in benefit liabilities. The plan is underfunded by $270 million, but retirees will continue to receive benefits without interruption, and future retirees can apply for benefits as soon as they qualify.

A few thousand more Penney employees who benefited from a supplementary pension benefits and contributed their own money to a plan that operated like a 401k but was uninsured filed claims in bankruptcy but should not get that money back.

JC Penney CEO Jill Soltau said in a prepared statement that she wanted to give “tremendous credit to our associates, whose hard work and persistent dedication to serving our customers are important reasons why JC Penney has reached this milestone.”

“Our goal from the beginning of this process has been to ensure that JC Penney will continue to serve its customers for decades to come, and this court approval achieves that goal,” said Soltau, who joined Penney in October 2018 and had set put in place a restructuring plan. before COVID-19 hits. “With the 2020 holiday season in full swing, we are excited to operate under the new ownership of Brookfield and Simon outside of Chapter 11 and under the JC Penney banner.”

Twitter: @MariaHalkias

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