Thu 09/10/2020 13:54 PM
Asset Sale Term Sheet
Credit Bid Term Sheet
Bidder Capitalization Exhibit
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This morning, J.C. Penney filed certain documents in support of the transaction disclosed by the debtors at Wednesday’s hearing
in which Simon Property and Brookfield in conjunction with DIP and first lien holders would acquire all of the assets of JCP. The agreements contemplate a credit bid by the first lien and DIP lenders and noteholders and a $300 million equity investment by Simon Property and Brookfield, disclosed at Wednesday’s hearing and included in a presentation attached to the 8-K prepared by Lazard, the debtors’ financial advisor. JCP would be split into a PropCo that would own 160 stores and six distribution centers with the goal of winding down or selling the properties, an OpCo owned by Simon Property and Brookfield that would own the remaining stores and intellectual property, and a liquidation company owning other credit card claims and other assets. According to the press release, Simon Property and Brookfield’s total purchase price for OpCo would be $1.75 billion, which includes the cash and new term loan debt. The lenders’ credit bid, according to the term sheet, would include the full amount of the DIP and up to $100 million of first lien notes and term loan.
The transactions detailed below and summarized by Reorg are based on exhibits included in the 8-K, a press release issued by the company and comments made by the debtors at the Wednesday hearing. The initial transaction for the assets appears to be memorialized in an undated credit-bid term sheet that contemplates the overriding acquisition of the assets by lenders. An exhibit detailing the bidder capitalization contemplates the three-part structure and includes an option for a third party to acquire the equity interests of OpCo from the lenders. A letter of intent from Simon Property and Brookfield and a separate undated asset sale term sheet include terms of the $300 million equity investment by Simon and Brookfield along with the debt given to the lenders.
Included in the 8-K and exhibits is a letter of intent by Simon Property and Brookfield to acquire OpCo and issue $500 million of new OpCo debt to JCP’s DIP lenders and first lien holders. The debtors state the LOI “is generally consistent with the framework of the restructuring process contemplated in the RSA,” which was entered into on May 15 with an ad hoc group of lenders and noteholders that held approximately 70% of the debtors’ first lien debt.
In addition, JCP received a form of asset purchase agreement term sheet and credit-bid term sheet from the ad hoc group related to their proposed credit bid. Terms of the transactions and securities along with supporting documents including master lease agreements between PropCo and OpCo and of the $500 million OpCo debt are summarized below.
Earlier today, the Office of the U.S. Trustee filed a notice
of a reconstituted official committee of unsecured creditors, which no longer includes Simon Property Group but otherwise comprises the same members.
Terms of the Credit-Bid Transaction
A credit-bid term sheet
details the terms by which “all or substantially all” of the J.C. Penney assets would be sold, via credit bid, to the DIP and first lien lenders. According to an exhibit to the credit-bid term sheet, entitled Bidder Capitalization Exhibit
, following the purchase the acquiring group would establish three separate entities to own the acquired assets: PropCo, Liquidation Co. and OpCo.
PropCo would acquire 160 owned and ground leased stores and six distribution centers together with “other assets and liabilities related thereto.” PropCo would then lease the properties to OpCo pursuant to the store and distribution center master leases detailed below. A grantor trust would be formed by PropCo to own the assets and lease to the new tenants pursuant to the master leases.
The Liquidation Co. would acquire certain claims of the debtors relating to the MasterCard, Visa and related litigations as well as rights to any returned amounts from the Synchrony reserve. The credit-bid term sheet states that 100% of the equity of Liquidation Co. would be distributed to the DIP and first lien holders. The separate asset sale term sheet that contemplates the Brookfield-Simon LOI specifies that distributions on account of Liquidation Co. assets would be split 50% to OpCo buyer and 50% to the DIP and first lien lenders.
Opco would acquire the debtors’ remaining assets and would include two entities: SPV-RE, which would acquire the debtors’ remaining owned and ground leased properties and related assets, and SPV-IP, which would acquire the debtors’ intellectual property assets. The exhibit notes that SPV-IP would grant licenses to PropCo and OpCo, as applicable.
The overall bid for substantially all of JCP’s assets will include (i) a credit bid of the full amount of the DIP; (ii) up to $100 million credit bid of the prepetition term loan and first lien notes obligations; (iii) a senior secured asset-based revolving credit facility for OpCo, which the exhibit adds may include a first-in last-out, or FILO, tranche of $310 million; and (iv) the issuance by OpCo of $500 million in “take back” debt that is secured by the assets of two special purpose vehicles established to acquire the real estate (SPV-RE) and intellectual property (SPV-IP) of OpCo.
According to the exhibit, 100% of the PropCo securities issued would be distributed to the DIP lenders and holders of the first lien term loan and first lien notes pro rata and based on the relative amounts of their credit bid. 100% of the equity in OpCo would also be distributed ratably to the same lenders and noteholders. The exhibit to the credit-bid term sheet notes, however, that a third party could purchase some or all of the equity in OpCo provided the proceeds would be either used to (i) reduce any cash consideration that would be paid at closing, (ii) fund PropCo, Liquidation Co. or OpCo, and/or (iii) be distributed pro rata to the DIP and first lien holders.
Pro Forma Capital Structure
A presentation entitled “Emergence Analysis” dated Sept. 4 in the 8-K includes the following sources and uses and exit capital structure for J.C. Penney and the related transactions. The presentation, prepared by Lazard, assumes a $300 million equity investment, $500 million in take-back debt, a $310 million FILO and $497 million drawn on the exit ABL to finance the transactions. Lenders would receive $318 million cash distribution in addition to the $500 million take-back debt. The ABL balance of $1.263 billion assumed as of Oct. 3 would be paid down.
Transaction Term Sheets Incorporating OpCo Sale
The cleansing materials contain two term sheets, one regarding the sale of substantially all assets and one regarding the credit-bid component (detailed above) of the larger transaction, which together lay out the details for the proposed sale of the debtors’ assets to the DIP and first lien lenders’ credit-bid “BidCo” and the newly formed “OpCo Buyer” owned by Brookfield and Simon. The 8-K notes the debtors “ha[ve] agreed to support the credit bid summarized in the Term Sheets.” The 8-K further states that the term sheets have not been executed by any party, are not binding, do not reflect any input from Simon or Brookfield and have not been reviewed by or agreed to by Simon or Brookfield.
In addition, the term sheets are “expressly not part of the LOI and may contain terms that are inconsistent with the LOI.”
Bid protections consist of a breakup fee equal to 3% of the cash portion of the first closing cash payment, payable to OpCo Buyer, via the credit-bid “BidCo” (a newly formed entity to effectuate the sale of the OpCo assets to the OpCo Buyer and to effectuate the sale of PropCo securities to the DIP lenders and first lien lenders), in the event that the first closing does not close due to a termination for breach by the debtors or in connection with an alternative transaction. The debtors will also reimburse all fees and expenses incurred by BidCo, in an amount to be determined, upon the termination of the sale transaction.
The overall “sale” would include the following components:
- OpCo Asset Sale. Via a section 363 sale, the debtors would sell all “OpCo Acquired Assets” and assign all “OpCo Assumed Liabilities” to the Brookfield-Simon OpCo buyer as a designee of the DIP and first lien lenders’ credit bid “BidCo.”
- OpCo acquired assets include “substantially all” operating assets and all of the real estate assets other than the PropCo assets. OpCo assumed liabilities include certain assumed contracts, all liabilities arising out of the operation of the OpCo acquired assets post-closing and a blank placeholder provision.
- Consideration for the OpCo asset sale consists of (i) cash in the amount of a $300 million OpCo equity contribution plus “an additional cash amount,” which may be funded by “a new ABL and/or FILO facility,” (ii) a credit bid of DIP and first lien obligations in an unspecified amount, and (iii) the assumption of assumed liabilities.
- PropCo Equity Transfer. Via either a chapter 11 plan or a section 363 sale, the DIP and first lien lenders would receive 100% of the securities issued by the new “PropCo.”
- PropCo’s assets would include “the 160 owned and ground leased real properties and the six owned distribution centers,” as well as other unspecified “related” assets and liabilities.
- Consideration for the PropCo equity transfer consists of a credit bid of DIP and first lien obligations in an unspecified amount.
A separate exhibit
details the credit BidCo’s capitalization and various required actions to consummate the contemplated sales, as further detailed in the descriptions of the OpCo and PropCo sales below. As an initial matter, BidCo would be capitalized with (i) an assignment of the DIP agent’s right to credit-bid the full amount of the DIP obligations, which include assets that were unencumbered prepetition; (ii) an assignment of the first lien collateral agent of the right to credit-bid up to $100 million (bracketed) of prepetition first lien term loan and notes obligations; (iii) an ABL for OpCo, which may include a $310 million (bracketed) FILO tranche; and (iv) the issuance by OpCo of $500 million take-back debt secured by a first lien on the assets owned by the two entities to be created by OpCo and a second lien on ABL assets. BidCo would also be responsible for creating three entities: (i) the PropCo; (ii) “Liquidation Co.,” which would acquire certain of the debtors’ claims related to MasterCard, Visa “and related litigations” as well as rights to any amounts from “the Synchrony reserves”; and (iii) OpCo.
The credit-bid term sheet contains the following milestones, all in brackets:
- Sept. 14: Debtors file the bidding procedures motion;
- Sept. 21: Debtors will obtain entry of the bidding procedures order;
- Oct. 4: Final bid deadline;
- Oct. 9: Auction, if necessary;
- Oct. 12: Debtors would have obtained approval of credit bid; and
- Oct. 26: Credit-bid closing.
Additionally, the term sheet contemplates a date no later than Sept. 23 that the debtors, the OpCo buyer, BidCo, the required DIP lenders and the consenting first lien lenders would sign the required definitive documents including the asset purchase agreement, the term loan facility, the master lease agreement and the distribution center lease.
OpCo Asset Sale Terms
According to the bidder capitalization exhibit to the credit-bid term sheet, OpCo would create two entities, “SPV-RE” and “SPV-IP.” SPV-RE would acquire the owned and ground leased properties not going to PropCo as well as most other assets “contained within such properties,” excluding inventory. SPV-IP would acquire the debtors intellectual property assets and “grant licenses to PropCo and OpCo, as applicable.”
The asset sale term sheet contemplates a working capital adjustment to be made with the first closing cash payment, which adjusts the payment up or down depending on whether net working capital as of the first closing date is greater or less than $1.923 billion. The first closing date is the second business day on which the conditions set forth in the asset purchase agreement are satisfied. Working capital was determined based on the following forecast included as an exhibit to the letter of intent:
Additionally, according to the term sheet, OpCo assets would include all cash in the stores, credit card receivables and cash in transit, as well as $50 million of other cash. The term sheet states that all other cash and cash equivalents would be retained by the debtors until distribution to the liquidating trust. The OpCo buyer would then transfer back to the debtors 50% of all cash received from the release of bankruptcy related credit card holdbacks.
The term sheet also contemplates an accounts payable earnout in which the buyer shall pay 20% of the difference of net merchandise accounts accounts payable to JCP in March 2022 and March 2023, as detailed below:
- On March 31, 2022, the buyer will pay JCP 20% of the difference of (i) average net merchandise accounts payable in fiscal 2021 and (ii) net merchandise accounts payable at closing of the sale transaction;
- On March 31, 2023, the buyer will pay JCP 20% of the difference of (i) average net merchandise accounts payable in fiscal 2022 and (ii) average net merchandise accounts payable in fiscal 2021;
- The payment is limited to the less of (i) the amount due or (ii) the amount that would cause JCP’s average LTM liquidity to fall below $500 million; and
- Any amount due and not paid as a result of the above, will be carried forward as a secured claim with a junior lien on collateral until the unpaid amount is paid in its entirety with no expiration.
Net merchandise accounts payable is defined as the merchandise accounts payable liability less the merchandise accounts payable prepayments asset, and shall include any merchandise related vendor financing.
PropCo Capitalization and Trust Certificates
At the close of the credit bid, PropCo would form a grantor trust that would own the 160 retail properties and six distribution centers that would be leased to OpCo pursuant to the master lease agreements. The trust would be initially capitalized with $25 million. Trust certificates would be distributed pro rata to the holders of the DIP obligations and term loan/notes obligations. Distributions would be made to trust certificate holders monthly on the 10th day of each month and include rent under the leases and net proceeds from any property sale.
The trustee would retain a third-party property operations manager, which the term sheet lists “e.g., HILCO” to manage the trust and its properties for a fee. The trustee would also retain one or more third-party real estate brokers, which the term sheet lists “e.g., Newmark/JLL, CBRE, Eastdil or C&W,” and overseen by Deutsche Bank as financial advisor to sell the properties. The term sheet states the “stated objective” is to sell the distribution centers within the first six months and the retail properties within 12 months
A footnote to the term sheet states that if the PropCo securities are not trust certificates then the required DIP lenders may require the debtors to list the PropCo securities on the New York Stock Exchange.
In addition to the above, the term sheet contemplates a transition services agreement, which would be entered into by OpCo buyer and PropCo, pursuant to which OpCo would provide certain services to the debtors and/or PropCo.
Nonbinding Letter of Intent
J.C. Penney disclosed that on Sept. 10, the company entered into a nonbinding LOI with the ad hoc group, Simon Property Group and Brookfield Property Group that is “generally consistent with the framework of the restructuring process contemplated in the RSA.” The company notes that the LOI is nonbinding and provides no guarantee that a transaction will be completed, as the terms of any potential transaction are subject to definitive documentation that must be agreed upon by all parties and subsequently approved by the Bankruptcy Court.
The exclusivity period extends to 15 days from the execution of the letter agreement.
In addition to the company, Simon, and Brookfield, other signatories to the LOI include:
Master Leases (Stores and Distribution Center)
- H/2 Capital Partners;
- Sculptor Capital Management;
- SPCP Group;
- Sixth Street Specialty Lending;
- KKR Credit Advisors;
- Owl Creek Asset Management; and
- Whitebox Advisors.
The company has revised its go-forward store count target to 653 from its May target of 604. The target comprises 160 REIT stores, 390 third-party lease stores and 103 owned stores, as illustrated below.
The company will enter into a single master lease for its stores which comprises:
- Core properties: 160 fee-owned and ground leased real properties comprising 33 “Tier 1” properties, 84 “Tier 2” properties, 20 “Tier 3” properties and 23 “Tier 4” properties;
- Landlord option properties: Landlord will have option to remove these properties;
- Tenant option properties: Tenant will have option to remove these properties; and
- Go-dark-no-substitution properties.
The single master lease for all of these properties, which would be an absolute triple net lease, will have an initial term of 20 years with five five-year renewal options available. The initial base rent will be $121 million per lease year, or a weighted average of $5.59 per square foot ($9 for tier 1, $6 for tier 2, $3.50 for tier 3, $2 for tier 4). Base rent shall be subject to an annual escalator of 2% per year beginning in the third lease year, and during the first lease year, the tenant shall be entitled to an abatement equal to 50% of base rent.
The tenant under the master lease for stores will be a newly formed bankruptcy remote SPE that is a direct wholly owned subsidiary of J.C. Penney Co. The landlord will be an UPREIT where the REIT will wholly own an operating partnership, or OP, and the OP will in turn directly or indirectly own the properties through one or more subsidiaries.
The lease guarantors will be NewJCP and all of its subsidiaries and all subsidiaries of JCP not separated into the REIT, excluding the Opco RE SPV and the Opco IP SPV. In addition to the lease guarantee, the obligations of the tenant under the lease shall be secured by a first-priority pledge of 100% of the equity interests in the tenant.
There are six fee-owned warehouse and distribution centers in the master lease agreement for distribution centers. JCP also operates five leased distribution centers but plans to reject two of the leases and operate with a total of nine distribution centers.
The tenant under the master lease agreement for the distribution centers will be a newly formed bankruptcy remote SPE that is a direct wholly owned subsidiary of J.C. Penney Co. that will lease the distribution centers from direct or indirect subsidiaries of the OP.
The lease will have an initial term of 20 years with five five-year renewal terms to be exercised at the tenant’s option upon 24 months’ prior written notice. The initial base rent will be $35.4 million per lease year, or $3.50 per square foot), subject to an annual escalator of 2% per year beginning in the third lease year.
OpCo Secured Term Loan
According to the filing, the proposed $500 million secured OpCo term loan facility, as proposed by the consenting first lien lenders, would consist of a single draw facility with a six-year maturity. The loan would amortize at 1% per year and would pay interest at L+8.5%.
The loan would be issued by a direct wholly owned subsidiary of a newly formed holding company that is owned by the Simon/Brookfield vehicle and would be guaranteed by the HoldCo and by domestic wholly owned subsidiaries.
Proceeds from the facility would be used to:
Cleansing Materials Financial Overview
- Pay the borrower’s rent under its leases;
- Pay ongoing working capital requirements;
- Refinance certain indebtedness of the borrower and its subsidiaries, including under the DIP; and
- Pay fees and expenses.
In connection with the chapter 11 filing, the company entered into NDAs with certain lenders, noteholders and other creditors, whereby the company agreed to publicly disclose certain cleansing materials upon the occurrence of certain events. These cleansing material items were prepared to facilitate discussions with the parties to the NDAs.
The cleansing materials provided the following illustrative sources and uses and pro forma capitalization for JCP OpCo assuming a required $500 million of ABL availability on an Oct. 3 exit date. The company projects $550 million of liquidity at exit and $1.3 billion of debt comprising $497 million under the ABL facility, $310 million under the new FILO facility and $500 million of take-back debt.
The company also includes a long-term post-emergence cash flow summary, which projects levered free cash flow of $739 million in fiscal 2021 based on $419 million of adjusted EBITDA, a $523 million net working capital benefit (driven by the “normalization” of trade terms and working capital efficiency) and $137 million of asset sale proceeds, partially offset by capital expenditures of $240 million. The company expects to end fiscal 2020 with $50 million of cash and $1.1 billion of total liquidity and projects to end fiscal 2021 with $686 million of cash and $1.7 billion of total liquidity. In fiscal 2024, the company projects levered free cash flow of $530 million based on adjusted EBITDA of $836 million, offset by capex of $262 million and a net working capital outflow of $9 million. The company expects to end fiscal 2024 with $2.5 billion of cash and $3.3 billion of total liquidity.
The cleansing material items also include a business plan update dated July 8. The company’s updates projections are shown below, which project fiscal 2020 net sales of $6.7 billion, down 37.4% year over year compared with the May 18
cleansing materials that projected fiscal 2020 net sales of $5.1 billion, down 53% year over year. Gross margin is projected to be 27.8% of net sales in fiscal 2020 compared with 26.4% in the May 18 materials. Adjusted EBITDA, including the impact of REIT occupancy expenses, is now projected to be negative $172 million in fiscal 2020 compared with negative $638 million in the May 18 materials.
The company also provided a summary of operating trends including traffic, conversion percentage and average order value for fiscal 2019 with projected amounts for fiscal 2021, fiscal 2023 and fiscal 2024.