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JC Penney lenders led by Aurelius seek to slow property sale

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A group of creditors to JC Penney is seeking to slow the sale of the bankrupt retailer's real estate to another group of lenders, saying that it provides the buyers an undeserved windfall and reeks "of not only greed but abhorrent bad faith".

[NEW YORK] A group of creditors to JC Penney is seeking to slow the sale of the bankrupt retailer's real estate to another group of lenders, saying that it provides the buyers an undeserved windfall and reeks "of not only greed but abhorrent bad faith".

The objecting creditors, led by Aurelius Capital Management, say they submitted a US$750 million competing bid for JC Penney's properties that would provide US$600 million more to the bankrupt estate and more evenly distribute proceeds among creditors. They're asking Judge David Jones to order a separate process for the property sale to the so-called DIP lender group, while proceeding with the sale of retailer's operations to its two biggest landlords.

"The lure of a windfall has so clouded the DIP lender group's judgment that its members are seeking value far in excess of their entitlements under the Bankruptcy Code," lawyers for the dissenting creditors wrote in an objection submitted Friday evening. The currently proposed sale "is manifestly contrary to the best interests of the estates and their creditors", according to the filing, which was made with the US Bankruptcy Court in Corpus Christi, Texas.

A representative for the DIP lenders didn't immediately comment, and JC Penney declined to comment.

HOLIDAY SEASON

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JC Penney has been racing to wrap up the planned two-part sale of its assets as the crucial holiday season approaches. The retailer has said the deal will save more than 60,000 jobs.

Under the agreement, JC Penney's assets would be bought by a group of firms including H/2 Capital Partners that provided JC Penney with debtor-in-possession, or DIP, financing to keep it operating while in bankruptcy.

The lender group would then sell the retail operations to mall landlords Simon Property Group and Brookfield Property Partners.

The Aurelius-led creditors say that the deal is structured in a way that will deliver a 162.4 per cent recovery for the DIP lenders, while leaving them with a recovery of just 10.3 per cent. Under their competing bid, the DIP lenders would get 100 per cent of their money back while allowing the minority group to recover 46.1 per cent of JC Penney's outstanding US$1.57 billion of first-lien debt.

TWO PARTS

The creditors are asking the court to split approval of the two transactions, which are set to be considered by Judge Jones during a Nov 2 hearing. Instead, they want to delay a hearing on the real estate sale until Nov 24.

Such a delay could upend chief executive officer Jill Soltau's plans to have JC Penney out of bankruptcy ahead of the crucial December 2020 holiday season. Joshua Sussberg, JC Penney's bankruptcy lawyer, has said a speedy sale is essential, warning that "otherwise-viable retail enterprises too often fail to emerge from Chapter 11 cases as a result of delay".

The existing agreement, though, has faced its own set of challenges. Talks stalled at one point between the DIP lenders and the mall landlords, with the proposed plan being hammered out during marathon mediation sessions last weekend. Discussions over the master lease agreement were scheduled to continue into this weekend.

The DIP lenders and landlords were given until Monday to finalise a master lease agreement that Judge Jones said he assumed would be "one of the longest and most complex lease agreements known to mankind".

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