The battle for the remains of J.C. Penney (OTC:JCPN.Q) isn't over as a small group of its lenders are balking at the deal to sell the bankrupt retailer to mall operators Simon Property Group (NYSE:SPG) and Brookfield Property Partners (NASDAQ:BPY).

Although the lenders don't object to the sale in principle, they're not happy that a large group of lenders will be receiving 90% of J.C. Penney's assets, including the proceeds from the sale, while the remaining lenders get the balance.

They also say there should be a competitive bidding process for the department store chain.

Bankruptcy petition

Image source: Getty Images.

Carving up the business

The Wall Street Journal says Aurelius Capital Management is leading the holdout of lenders that include Carlson Capital and D.E. Shaw Galvanic Portfolios, which together own about 16% of J.C. Penney's debt. 

They say the proposed $800 million sale of J.C. Penney siphons almost all of the proceeds to H/2 Capital Partners, which holds a majority of the debt owed by the retailer, along with KKR Credit Advisors and Sculptor Capital Management.

In exchange for agreeing to the sale to Simon and Brookfield and forgiving some $900 million of the $5 billion in debt J.C. Penney owes -- plus another $100 million in loans taken out before the bankruptcy -- H/2 and the other lenders will buy the rest of the stores the mall operators are not acquiring, and will then lease them to Simon and Brookfield.

The proposed sale of J.C. Penney was hatched as a way to stave off liquidation of the retailer, but Aurelius has been critical of the process and of being able to supply it with a bankruptcy loan. The lender contends H/2 is being overcompensated as it is receiving assets valued at $2.3 billion.

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