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The Deal: J.C. Penney's Dilemma: To File or Not File

NEW YORK ( TheStreet) - Distressed investors piling into department store chain J.C. Penney (JCP - Get Report) could be taking note of the company's liquidity crunch and figuring on either a turnaround or an eventual bankruptcy.

When hedge fund manager William Ackman left the company's board after a public feud over who should be managing the retailer, he promptly dumped his 18% stake through a Citigroup (C)-underwritten share sale at $12.90 a piece.

JCPenney shares were gaining 0.1% to $14.24 in Friday trading.

But instead of staying away, other big-name hedge funds piled right on. Richard Perry, who knows a thing or two about retail distressed investing--last year with the help of Ron Burkle's Yucaipa Cos. LLC he engineered a debt-for-equity swap for Barney's Inc. with then owner Istithmar World PGSC--has an 8.62% stake in the company. J. Kyle Bass' Hayman Capital Management LP took a 5.2% stake, while Glenview Capital Management LLC revealed a 9.1% stake.

That doesn't mean, however, that those investors don't have their eye on the downside. Hayman Capital, for one, has reportedly picked up J.C. Penney debt in the form of investing in the company's secured loans.

One industry banker even has a timeline for when the retailer should start thinking about formulating plans for a bankruptcy filing. If the company isn't seeing momentum build by October, this person said, then it should start consulting its advisers about a trip to court.

What will tip the scales in favor of bankruptcy is when factors such as CIT Group Inc. begin to lose confidence in J.C. Penney, which would damage its ability to buy inventory. For now, however, the banker said, factors still expect to be paid so it's currently under no pressure to file. (Factors buy a company's accounts receivable, or invoices, at a discount.)

And one distressed investor, David Tawil, co-founder of hedge fund Maglan Capital LP, which does not have a stake in J.C. Penney, said it would be better for the company to file for bankruptcy sooner, rather than later. Tawil, a former bankruptcy attorney at Skadden, Arps, Slate, Meagher & Flom LLP and Davis Polk & Wardwell LLP, and then a fund manager at Credit Suisse Group analyzing distressed situations, said that when companies wait until they run out of cash to file for bankruptcy, they end up liquidating, rather than reorganizing.
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