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U.S. lenders are alleging that Hudson’s Bay Co. has spirited its assets to a new company in Bermuda in a lawsuit that accuses the retailer of engaging in a “clandestine corporate shell game.”

The lawsuit, filed in the United States last week, sheds light on the inner workings of the 350-year-old retailer, which has undergone a restructuring since its executive chairman, Richard Baker, won shareholder approval in February to take the company private.

The lawsuit was launched after entities owned by a joint venture between Hudson’s Bay and Simon Property Group defaulted on US$7.4-million in debt payments for April and May.

In a response filed on Saturday, Hudson’s Bay acknowledged the restructuring occurred more than two months ago, confirming that its Canadian corporate entity has been renamed, moved to British Columbia, and is now 100-per-cent owned by a newly established Bermuda entity, HBC LP.

The lawsuit alleges the restructuring amounted to “asset stripping” and is seeking a freeze on billions of dollars of the company’s assets. Hudson’s Bay says the plaintiffs are engaging in “hyperbole” and are “dead wrong” in their allegations of an asset-stripping scheme.

The suit was filed by holders of a loan granted not to Hudson’s Bay directly but to entities owned by the joint venture between Hudson’s Bay and Simon. The joint venture owns the real estate for 34 stores of retailers Saks Fifth Avenue and Lord & Taylor.

Under the terms of the loan, Hudson’s Bay guaranteed the rent payments on those stores. However, since the retailers have now stopped paying rent during the COVID-19 pandemic, the lenders say they need to ensure Hudson Bay’s assets are available to backstop the loan.

Hudson’s Bay filed its response to the lawsuit on Saturday. In it, the company argues it is not the borrower on the US$846-million loan and therefore not the appropriate target for legal action.

“Simply put, HBC’s assets ... were never part of plaintiff’s bargained-for collateral,” the company said in the filing. It characterized the lawsuit as “a transparent attempt to gain leverage in negotiations” with Hudson’s Bay. In its response, HBC deni.

None of the allegations have been tested in court.

Hudson’s Bay says the joint venture’s real estate, which is used to back the loan, is worth more than US$1-billion – far exceeding the US$7.4-million in missed debt payments for April and May.

Hudson’s Bay owns Saks, and while it sold the Lord & Taylor banner last August, the sale did not include the chain’s real estate assets or leases. Those remained with HBC and the real estate joint venture that borrowed the money, HBS Global Properties. HBC agreed to pay rent on the Lord & Taylor stores for at least three years after the deal.

Hudson’s Bay is North America’s oldest company and its heritage is intertwined with the founding of Canada. For years, it has struggled to adapt its department store business to consumers’ changing habits. The pandemic has exacerbated challenges in the retail industry. With stores closed or operating with severe restrictions, retailers are now facing a cash crunch and are cutting back on expenses. Many are failing to make rent payments as measures to contain the pandemic have shut down much of the global economy.

Hudson’s Bay has also failed to pay rent to Canadian landlords in April and May, triggering property owners, including Oxford Properties, to issue notices of default to the retailer, according to multiple sources familiar with the matter. The Globe and Mail agreed to keep the sources’ identity confidential because they are not authorized to speak publicly about the missed payments.

In the U.S. lawsuit, the plaintiffs say they were “shocked” when Hudson’s Bay revealed that the Canadian company could no longer sign the loan documents as a guarantor. The lawsuit alleges that a lawyer for HBC disclosed the restructuring in an e-mail, and explained that Bermuda-based HBC LP “indirectly owns 100 per cent of Hudson’s Bay Co. ULC, and holds all of the assets and liabilities that were held by Hudson’s Bay Co. immediately prior to the closing.”

To the plaintiffs, this “set off alarm bells,” because Hudson’s Bay was effectively saying its “bargained-for, ultimate guarantor of its US$850-million loan no longer existed, and apparently had been succeeded instead by an empty shell.” The assets and liabilities of Hudson’s Bay Co. are “a critical economic backstop” for the loan, the plaintiffs say, and the borrowers wouldn’t have received as favourable an interest rate without that guarantee. The lawsuit claims that the failure to inform the lenders of the reorganization violates the terms of the loan.

The lenders are a group of investors who own a series of commercial mortgage pass-through certificates created in 2015 by J.P. Morgan, Bank of America and Column Financial Inc., who originated the loan.

HBC said in its filing on Saturday that when the restructuring occurred, the Canadian company remained a guarantor of the operating leases, while the Bermuda-based parent company also assumed the obligations – meaning the plaintiff now had two guarantors.

Hudson’s Bay still maintains operational headquarters in Toronto and New York after the restructuring. In the court documents, HBC said its Canadian assets and operations are worth more than US$3-billion. While its Canadian assets remain in the Canadian corporation, it has moved its U.S. assets to the Bermuda entity, Hudson’s Bay acknowledges in its response.

“The reorganization simply mitigated additional taxes in jurisdictions outside of Canada,” the company said in a statement provided to The Globe.

Mr. Baker’s go-private bid kicked off a protracted battle with dissident shareholders, who called for his removal. The largest of those shareholders, Catalyst Capital Group, accused Mr. Baker and the company of undervaluing the shares and providing shoddy disclosure. After sweetening his formal bid, Mr. Baker won approval to take the company private this year.

At the time, Mr. Baker said in an interview that going private would make it easier for the unprofitable company to explore options to turn around the business.

That was before COVID-19 stunned the retail industry, causing significant damage to many retailers, particularly in the department store sector.

Moody’s Investors Service, which rates the creditworthiness of corporate debt, said in a May 12 update “as the U.S. economy contracts, we expect many more retailers will default or wind up in bankruptcy court. … Department stores have reverted to survival mode amid sweeping, temporary store closures.”

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