J.C. Penney lenders could take over company as sale talks sputter

• As sale negotiations stall, attorneys for J.C. Penney said at a hearing Monday that key lenders were "dedicated" to supporting the retailer as an operating entity by converting their debt holdings into equity in a reorganized Penney.
• Kirkland & Ellis partner Joshua Sussberg, who is representing Penney in its Chapter 11 case, said at the hearing that first-lien and debtor-in-possession lenders won't be "held hostage" by stakeholders holding out in sale discussions. Penney plans to prepare documents detailing a lender equitization in the company over the next 10 days and also file bidding procedures around the transaction that would be consummated within about a month.
• Sussberg also said that stores left off of Penney's previous closure list while a sale would be negotiated would now need to be closed. He did not specify the number or locations but said a court request would be filed soon.

Stakes are high and time is running short for J.C. Penney in Chapter 11. Vendors are on standby and "waiting with bated breath" for the future of the retailer to be made clear, Sussberg said. While suppliers wait for assurance that the company will continue operating and exit bankruptcy, they are withholding products.

That's a sign that the market as a whole remains uncertain on the fate of the department store. Sussberg has gone to lengths to reassure the world that the company is working tirelessly to save itself. Of course, willpower alone won't be the only consideration in determining the retailer's fate. 

Andrew Leblanc, a managing partner with Milbank representing first-lien lenders, said that the bidders for Penney have been a "disappointment," and that acquisition talks have moved backward from the weeks prior. 

Those bidders reportedly include a pair of Penney's major landlords — Simon Property Group and Brookfield Property Partners — as well as private equity firm Sycamore Partners and Hudson's Bay Co., owner of Saks Fifth Avenue. 

Leblanc said that the lenders he represents were exploring every option available. "This is the last time we can get this done," he said. "Failing that, we're exploring all other alternatives."

As talks stall and deadlines get pushed, the stakes become more starkly important. U.S. bankruptcy Judge David Jones, who in August expressed growing impatience with the protracted negotiations, on Monday said that he has allowed Penney and its attorneys to continue extending the negotiation process because "the alternative is the death of an entity."

All of this is taking place against the backdrop of a still very difficult environment for retailers and department stores in particular, as COVID-19's spread continues to stall economic and retail recovery. Penney disclosed recently that it swung back to large operating and net losses in July, after a short-lived recovery in June. Analysts estimate that sales and profits for department stores and other mall players could remain depressed for more than a year as pandemic disruption winds on.