The first day
hearing in the J.C. Penney
chapter 11 cases has concluded, with the debtors receiving all requested relief as modified by certain comments on the record. Judge David Jones noted that “retail cases … have to move quickly,” and informed the parties at several points throughout the hearing that the court would be maximally flexible on future scheduling and hear matters in formats including status conferences as needed.
Joshua Sussberg of Kirkland & Ellis, counsel to the debtors, detailed J.C. Penney’s “plan for renewal” and said the chapter 11 filing is “absolutely about” the coronavirus. He noted that the company’s pursuit of out-of-court “liability management” transactions during mid-to-late 2019 was impeded by the arrival of the coronavirus and its effects upon the debtors’ operations, namely government-mandated store shutdowns and the corresponding impacts on cash flow. Sussberg said the company would like to bring back as many of its approximately 85,000 employees, many of whom have been furloughed, as soon as possible, and that the debtors’ liquidity should provide for flexible and accelerated store reopenings as and when permitted by the jurisdictions in which J.C. Penney operates. He further noted for the record that J.C. Penney and Sephora have entered into an agreement resolving the issues raised in Sephora’s prepetition litigation.
Although the debtors only sought access to cash collateral - on a consensual basis - at today’s hearing, and will seek approval of their proposed $900 million DIP facility at a later hearing, the proposed DIP featured prominently at the first day hearing. According to Sussberg, the DIP lenders had wanted the company to seek approval of the DIP facility, including a proposed $450 million rollup, at today’s hearing, but the debtors persuaded them to wait because that issue could have been contested and the debtors were seeking a smooth entry into chapter 11 with a primary focus on employee matters. Sussberg noted that in return for the DIP lenders’ agreement to postpone court consideration of the DIP, J.C. Penney paid upfront DIP commitment fees of 10% prior to the petition date.
Kris Hansen of Stroock, counsel to a crossover group of holders of the first lien term loans, first lien notes and second lien notes raised preliminary concerns with the proposed DIP facility. Hansen said the group currently holds 12% of 1L term loans, 16% of the 1L notes and 61% of the 2L notes. Hansen said that the group has been “disenfranchised” from the process, adding that the debtors’ description of the restructuring process is the “antithesis” of fairness and inclusion suggested during the debtors’ opening presentation at today’s hearing. Sussberg later refuted certain of Hansen’s comments, suggesting that the crossover group could propose an alternative DIP proposal. “Sharing in the economics” of the existing proposed DIP “is all that he’s talking about,” Sussberg continued, noting that the debtors welcome lender group collaboration but cannot ultimately force any lenders to work together.
Hansen criticized the debtors’ liquidity management, noting that in addition to burning over $1 billion of cash since early February, the debtors made approximately $72 million of payments in the last week to matters not directly related to operations. He highlighted a $9.9 million
executive compensation payment on Tuesday, May 12, asserting that this was essentially a key employee retention plan payment which the company should have waited to make postpetition, where it would be subject to court oversight and the Bankruptcy Code’s limitations on KERP payments.
Hansen also expressed concern regarding the DIP commitment fees in the amount of $45 million which were paid to DIP lenders prepetition. He contended that the $450 million new money portion of the proposed DIP facility should be viewed for now as solely the $225 million initial draw commitment as the debtors may not eventually meet the “stringent conditions” to access the $225 million delayed-draw tranche. As a result, the “purported” 10% DIP fee - already paid - could become a 20% fee, Hansen said. He posited that the business plan approval milestone, consent over which is held by the existing DIP lenders, is a “hair trigger” creating uncertainty regarding the potential second draw.
The court scheduled a DIP and final cash collateral hearing for June 2 at 4 p.m. ET, with an objection deadline of May 28 at 5 p.m. ET. The court also set a hearing for final approval of operational motions on June 11 at 2:30 p.m. ET, with an objection deadline of June 4.
Reorg’s live coverage of today’s hearing can be found
HERE.