Aurelius Group Slams J.C. Penney Sale, Prepares a Rival Bid

A group of J.C. Penney Co. debt holders including Mark Brodsky’s Aurelius Capital Management said it’s preparing a cash bid for the bankrupt retailer, saying that an existing offer “appears to grossly undervalue” the department store chain.

In court papers filed Monday, the group -- which holds some $162 million of J.C. Penney term loans -- attacked the earlier bid from lenders led by H/2 Capital Partners as overly generous to the H/2 group at the expense of other creditors. Aurelius is known as one of the most aggressive and sometimes combative investors in distressed companies.

The challenge could lead to an expensive and time-consuming court fight for J.C. Penney, whose lawyers have cautioned that a speedy closing is crucial to the retailer’s exit from bankruptcy. Aurelius and its allied debt holders have intervened in the case before, attacking its bankruptcy loan as “predatory.”

“Blind and hurried pursuit of a demonstrably prejudicial sale of substantially all of the debtors’ assets is not an acceptable outcome,” the dissenters said in court papers.

Value Fight

Under the deal that J.C. Penney already agreed to, creditors would swap some $1 billion of debt -- mostly bankruptcy loans -- for ownership of 160 J.C. Penney stores and six distribution centers, according to the Aurelius group’s court papers. Those creditors would then get rent payments from J.C. Penney itself, whose operations are set to be bought by Simon Property Group Inc. and Brookfield Property Partners for $800 million.

Lawyers for J.C. Penney said as recently as Sept. 30 that creditor disputes shouldn’t hinder the progress of its deal.

J.C. Penney and its lenders were “in discussions to resolve potential intercreditor issues,” said the company’s Kirkland & Ellis attorney Joshua Sussberg in a court filing, and “do not believe those issues will pose any impediment.”

The dissenting creditor group -- which also includes the likes of Avenue Capital, GoldenTree Asset Management and D.E. Shaw -- argue that $1 billion of debt forgiveness is a lowball offer that unfairly benefits J.C. Penney’s major bankruptcy lenders. The deal and overall sale process “evidences a lack of good faith” on behalf of J.C. Penney, according to the group’s objection.

J.C. Penney equity holders have made similar claims about the value of the existing bid. An adviser to shareholders argued in court documents last month that the company’s hard assets alone are worth about $6.6 billion, and said the retailer’s equity value could be as high as $3.2 billion.

Shareholders wouldn’t likely receive any recovery on their claims even in the event of a higher bid, as the company would have to first repay about $5 billion in debt before value could flow to equity holders.

Deal Interrupted

Aurelius has disrupted bankruptcy processes in the past. In the case of shoe seller Nine West Holdings Inc., it eventually scored a $120 million payout from private equity firm Sycamore Partners over claims the 2014 buyout of the business rendered Nine West insolvent while enriching shareholders by over $1 billion.

The New York-based hedge fund also made waves when it triggered the bankruptcy of Windstream Holdings Inc. through its victory in a lawsuit against the rural phone company. And it spent years in a battle with Argentina over defaulted sovereign bonds before winning a $4.65 billion payout in that dispute.

The group challenging J.C. Penney’s sale made clear it doesn’t oppose the part of the transaction in which Simon and Brookfield would acquire the retailer’s operations, which could save some 70,000 jobs and keep the company alive.

A representative for J.C. Penney declined to comment. Lawyers for the H/2 group didn’t immediately respond to requests for comment.

©2020 Bloomberg L.P.

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