JC Penney wins approval of contentious bankruptcy financing

[NEW YORK] JC Penney Co won approval from a federal judge Thursday for its controversial US$900 million bankruptcy financing package, overcoming objections from creditors and clearing a path toward a restructuring plan.

The approval gives the retailer fresh cash to help cover its costs while in bankruptcy. But the terms of the loan drew criticism from stakeholders - one creditor group previously called the financing "predatory" and a lawyer for junior creditors called it a "hold-up."

The loan gives JC Penney access to US$225 million now and possibly another US$225 million next month, but is tied to a restructuring deal that lets lenders force a sale of the retailer if they don't agree on a business plan by July 14. The loan also contains a somewhat controversial tool that elevates some of the lenders' holdings relative other creditors, a so-called roll-up of the other debt claims.

"If we were in a perfect world, this financing package would be highly objectionable," US Bankruptcy Judge David Jones said before approving the loan in a hearing Thursday. "It contains an awful lot that you simply look at and you don't like."

Still, Mr Jones acknowledged the group of creditors offering the loan is taking a big risk by lending the bankrupt retailer money, calling it an investment into "a murky hole." The loan offered the only path forward for JC Penney, Mr Jones said, adding he would not allow the case "to be bogged down in fights that fail to recognize the big picture and what's at stake."

The creditor group backing the loan and related restructuring deal own most of JC Penney's high-ranking debt and, as of May 15, included H/2 Capital Partners, Silver Point Capital and Owl Creek Asset Management, court papers show. The group is "going to be accountable for the outcome in this case," Joshua Sussberg of Kirkland & Ellis, JC Penney's bankruptcy lawyer, said earlier in the hearing.

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The approval follows a settlement between creditors funding the bankruptcy loan and a separate faction of debt holders that opposed it, which argued in filings that the court shouldn't be "bullied" by the senior creditors. That group agreed to drop its opposition in exchange for having US$53 million of its debt holdings rolled-up in the package, Kris Hansen of Stroock Stroock & Lavan said on behalf of the debt holders. The group includes Aurelius Capital Management, according to a presentation given in the hearing.

A group of low-ranking creditors maintained their opposition to the financing, with attorney Cathy Hershcopf of the law firm Cooley calling it "a hold-up" by the lenders "who are holding all the important cards right now." Jones overruled the objection.

The case is JC Penney Company Inc., 20-20182, US Bankruptcy Court for the Southern District of Texas (Corpus Christi)

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