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Law360 (May 16, 2020, 5:45 PM EDT) -- Illustrating the urgency of iconic retailer J.C. Penney's $5 billion Chapter 11 case in the midst of the COVID-19 pandemic, a Texas judge convened a rare weekend first-day hearing on Saturday as the company pursues restructuring efforts to either sell or reorganize the business by late summer.
During the hearing, conducted via video and telephone conferencing, debtor's attorney Joshua A. Sussberg of Kirkland & Ellis LLP said weeks of negotiations between J.C. Penney Co. and its creditors led to a restructuring support agreement that will see the company form a public real estate investment trust to hold its real property assets while the retail operations will stand alone as an operating company.
At the same time, J.C. Penney will run a marketing process to gauge interest in the acquisition of the company and give the debtor the opening to pivot to a sale if there is the potential to realize more value for the benefit of creditors, Sussberg said.
"We are running a marketing process because there is robust interest. There are third parties interested in investing and buying this business," Sussberg said. "It is our job to run out every single one of those opportunities."
The company will begin providing access to due diligence materials and information as early as Saturday evening, he said.
Sussberg said the company had been undergoing a comprehensive business overhaul for the last two years, but the outbreak of COVID-19 doomed those efforts when it forced the retailer to shutter all 850 of its stores and furlough most of its 85,000 employees.
"This is absolutely about the coronavirus," Sussberg said in response to media reports that the company would have had to file for bankruptcy even without the pandemic. "This is about a governmental shutdown, and it's about us all being on video chat for this hearing."
Before the coronavirus outbreak, J.C. Penney's "Plan for Renewal" had resulted in higher than expected financial performance for 2019 and improvements in same-store sales in six of its eight merchandise divisions, he said.
But when the company closed its stores, most of its revenue dried up and the company was forced to fully draw down a $1.25 billion revolving credit facility to fill in its funding gaps, according to Sussberg.
The company also froze hiring, cut down on capital expenditures, suspended planned merit pay increases for 2020, furloughed the bulk of its workforce and began negotiations with landlords and creditors.
Mid-July will serve as the inflection point when the debtor will need to decide which track — restructuring or sale — it intends to take. U.S. Bankruptcy Judge David R. Jones said he understood the proposed milestones, but encouraged the debtor to act more quickly.
"You said it's fast but fair. I want you to know that, at least from my looking at it, it's not fast enough," Judge Jones said of the proposed process, which would see confirmation of a restructuring plan or approval of a sale by August. "It's not going to bother me to see you beat the milestones and accelerate the process."
To fund the case, J.C. Penney has obtained a commitment for up to $900 million in debtor-in-possession financing to be provided by a group of first-lien lenders. The DIP motion will not be heard until June 2, when the debtor will also seek permission to tap into $225 million of new money on an interim basis, with another $225 million in cash becoming available later in the case, depending on certain variables and milestones.
The other $450 million of the DIP package will come in the form of a roll-up of prepetition debt. J.C. Penney also has about $475 million of cash on hand to pay the freight of its case.
Kristopher M. Hansen of Stroock & Stroock & Lavan LLP, representing a group of lenders with holdings in both the first-lien and second-lien debt packages of the debtor, teed up a dispute with the debtor and the group of lenders that signed on to the restructuring support agreement.
He said that his clients have been barred from participating in the DIP and restructuring packages and that J.C. Penney has spent significant sums of money in the run-up to the bankruptcy filing to avoid having to ask the court for permission for some of its actions.
Hansen said the company paid $10 million in executive bonuses in the days before its Chapter 11 filing and also paid $45 million in upfront commitment fees to the DIP lenders before coming into court. Neither of those actions would have been looked upon favorably by the court, he argued. The DIP fee payment in particular raises serious concerns for his clients since a second draw of $225 million of cash under the DIP looks to be very unlikely at this point.
"Our view here is this process does need to be made fair," Hansen told the court. "We are going to work hard to propose an alternative DIP to the company in short order."
Sussberg responded to Hansen's comments by saying the prepetition negotiations among creditor constituencies were open to all lenders and that he welcomed everyone's participation before the DIP is submitted for consideration by the court at the June 2 hearing.
"I'd welcome vast participation and all of the lenders working together," he said. "If we can make that happen, that's all fine and good. If we can't, Mr. Hansen knows exactly what to do to put together an alternate DIP."
Judge Jones approved a typical slate of first-day relief for J.C. Penney on Saturday, including requests by the debtor to use its lenders' cash collateral, pay employee wages and certain benefits, pay insurance premiums and pay the trade claims of key vendors.
Following the completion of the scheduled motions, Judge Jones also offered to hold weekly status conferences in the case if necessary to ensure the proceeding moves along swiftly and efficiently.
"I am here and I want to see this work," Judge Jones said. "There are 85,000 people that are the most important 85,000 people to me at the moment that are depending on all of your respective skill sets and talents."
J.C. Penney filed for Chapter 11 protection May 15 after weeks of anticipation following missed debt service payments. It carried more than $4.9 billion of debt into court in the form a $1.1 billion asset-based lending facility, a $1.5 billion term loan, $500 million in first-lien notes, $400 million in second-lien notes and $1.3 billion in unsecured debt.
Founded in 1902 by James Cash Penney, the company opened its first store in Kemmerer, Wyoming, under the name The Golden Rule. The company said it generated more than $10 billion in net sales in 2019, down more than 8% from the previous year.
J.C. Penney joins other significant retailers that have filed for bankruptcy protection in the wake of the pandemic, including clothing seller J.Crew and luxury department store Neiman Marcus.
J.C. Penney is represented by Joshua A. Sussberg, Christopher J. Marcus, Aparna Yenamandra, Rebecca Blake Chaikin, Allyson Smith Weinhouse and Jake William Gordon of Kirkland & Ellis LLP and Matthew D. Cavenaugh, Jennifer F. Wertz, Kristhy M. Peguero and Veronica A. Polnick of Jackson Walker LLP.
The case is In re: JC Penney Company Inc., case number 20-20182, in the U.S. Bankruptcy Court for the Southern District of Texas.
--Editing by Jill Coffey.
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