NEW YORK, United States — The lenders steering J.C. Penney Co.'s bankruptcy are considering joining forces with an outside bidder to buy the retailer after efforts to line up an independent owner stalled.

The plan envisions the hedge funds that hold J.C. Penney’s loans would become co-owners of a business they never planned to run, in partnership with a third party that could include one of the potential buyers they’ve been wooing, according to people with knowledge of the developments. They asked not to be named discussing the private and still-tentative plan.

A representative for J.C. Penney declined to comment.

The lender group was already set to take over most of J.C. Penney’s real estate at the outset of the bankruptcy case. This would have involved spinning the properties into a real estate investment trust and selling the rest of the retailer to the highest bidder.

Bid Breakdown

Potential bidders Simon Property Group Inc. and Brookfield Property Partners had clashed with the lender group over terms including redevelopment rights and the restrictions imposed by the master lease agreement, according to people familiar with the matter. The mall owners’ buyout bid was considered the best hope for keeping more of the retailer’s stores open, the people said.

The private equity firm Sycamore Partners has also held bid talks with lenders, as has Authentic Brands Group LLC. Sycamore owns the department store chain Belk Inc., among other retailers, and Authentic recently bought Brooks Brothers out of bankruptcy.

At a court hearing Monday that detailed breakdowns in that sale process, representatives for J.C. Penney said they were starting the process of handing full ownership to the lenders while continuing to explore bids.

“While it is possible that one of the bidders comes back into the transaction, we can no longer stand idly by and allow for negotiating postures to stand in the way of 70,000 jobs and our vendor base,” said Joshua Sussberg of Kirkland & Ellis LLP, which represents J.C. Penney.

But behind the scenes, the lenders are getting creative and pursuing the third option, co-ownership, the people said.

Lender Group

The lenders, which include H/2 Capital Partners, Silver Point Capital, Sculptor Capital Management, Brigade Capital Management and Sixth Street Partners, are not in the business of owning or operating retailers, yet they are under pressure to step in to keep the chain alive given the potential job losses, the people said.

Representatives for the lenders and bidders either declined to comment or didn’t immediately respond to requests for comment.

Jobs, Jobs, Jobs

Preserving retailers — and their jobs — has become an increasingly salient consideration in bankruptcies since the 2018 liquidation of Toys “R” Us. The shutdown and disappearance of the toy merchant’s tens of thousands of positions ignited a worker campaign for stronger employee protections that won the backing of prominent politicians, putting stakeholders in bankruptcies under much sharper scrutiny.

That means even lower offers that avoid liquidation can win out in bankruptcy auctions, as was the case with Sears Holdings Corp. last year. Pressure to preserve jobs has continued to mount in the wake of millions of pandemic-related job losses.

U.S. Bankruptcy Judge David Jones has been clear that he has a similar goal for J.C. Penney, last month admonishing the parties involved to find a prompt solution to save the retailer.

“Thousands of jobs and the very essence of the country’s infrastructure are at risk,” Jones said in court documents last month. “The parties have reached the end of the court’s patience. Negotiating postures and egos will be put aside.”

By Eliza Ronalds-Hannon and Lauren Coleman-Lochner, with additional reporting from Jeremy Hill