Sears Holdings Corp. has filed for Chapter 11 in bankruptcy court in Manhattan, the company announced.
In connection with the filing, Eddie Lampert resigned as the company’s CEO, effective immediately, to be replaced by an “Office of the CEO” to manage the company’s day-to-day operations that is composed of CFO Robert Riecker and retail executives Leena Munjal and Gregory Ladley. Lampert will continue, however, as chairman of the board. In addition, the company has appointed a chief restructuring officer, Mohsin Y. Meghji, who is a managing partner of M-III Partners.
The filing, which was announced in the early morning hours, was expected. Sears had a $134 million debt payment due today on its second-lien debt that it was widely expected to miss, determining the timing, and numerous published reports last week said that Sears had hired boutique advisory firm M-III Partners to help prepare the filing and that the company was seeking DIP financing.
The company said in a news release that it “expects to move through the restructuring process as expeditiously as possible and is committed to pursuing a plan of reorganization in the very near term as it continues negotiations with major stakeholders started prior to today’s announcement.”
In connection with the filing, the company said it had commitments for $300 million in senior priming DIP financing from its senior secured asset-based revolving lenders, and that it was negotiating a $300 million subordinated DIP with hedge fund ESL Investments, the company’s largest stockholder and creditor.
Lampert is ESL’s founder and CEO.
The senior DIP is composed of roughly $189 million in revolving ABL commitments, priced at L+450, with an undrawn commitment fee of 0.75%, and a $111 million term loan subject to a borrowing base formula at L+800, according to bankruptcy court filings. Bank of America is the agent.
The company told vendors that with the DIP funding it would be able to pay them in the ordinary course of business for goods and services provided after today. Pre-petition amounts owed, however, would be repaid in the context of a reorganization plan, although some vendors would receive preferred treatment under the company’s “critical vendor motion.”
According to the court filing, some 200 vendors had stopped shipping merchandise to the company in the past two weeks.
The contemplated junior DIP, meanwhile, would be in an initial amount of $200 million, which could be upsized to $300 million at the discretion of the agent bank (which is to be determined, but will be named by ESL), and would bear interest at L+950. Cyrus Capital would also be a lender under the junior DIP, court filings show (note, however, that while it is included in the company’s DIP approval motion, the junior DIP will not be considered by the court until a second interim hearing, and could be replaced by an alternative financing transaction).
The company said in court filings that it only had a short period of time in which to negotiate the DIP because it first approached lenders only 10 days ago. The company explained that it was hesitant to approach potential lenders too far in advance because of concerns that media focus on the company would cause such inquiries to be become a self-fulfilling prophecy, adding, “In hindsight, those concerns about adverse publicity were well-founded, as discussions regarding debtor in possession financing become the subject to media reports and speculation.”
In any event, the company said its Sears and Kmart stores, along with its online and mobile platforms, are open and continue to offer a full range of products and services to members and customers.
This is significant, as news reports last week said that some of the company’s lenders were pushing for a liquidation of the company.
The company said in a news release that it intends to reorganize around a smaller store platform of EBITDA-positive stores, adding that it is currently in discussions with ESL regarding a stalking-horse bid for the purchase of a large portion of the company’s store base.
The company also said it plans to close 142 unprofitable stores near the end of the year, and that liquidation sales at these locations “are expected to begin shortly.” The company noted these closings would be in addition to the 46 store closings that the company previously announced.
In court filings, the company said it would reorganize as a “member-centric” business.
More specifically, in terms of a reorganization path, Riecker explained in his first day declaration filed with the bankruptcy court that about 400 of the company’s stores are “four-wall EBITDA positive (before any lease concessions),” and that the company intends to sell “these and other viable stores, or a substantial portion thereof,” as a going concern pursuant to Section 363 of the Bankruptcy Code. These are the stores about which the company is in negotiations with ESL, Riecker said, adding that if a transaction were successful, the result would be “a right-sized version of the company” that not only would save the Sears and Kmart brands, but “the jobs of tens of thousands of employees.”
Additionally, Riecker said the company would market and sell certain non-core assets, such as intellectual property and specialty businesses, to help finance the Chapter 11 cases and maximize value. Riecker said the company has “moved those discussions [excluding the store closures already announced] within the confines of the Chapter 11 cases to provide all of the company’s stakeholders, as well as the court, with the opportunity to evaluate the wisdom of those transactions.”
The liquidations of the initial round of 142 store closures would net the company $42 million, Rieger said.
According to Riecker’s declaration, the company has “certain tax attributes,” including a tax basis in certain assets exceeding the value of those assets, in excess of $5 billion in net operating loss carryforwards, and tax credits of roughly $900 million, although it is unclear at this point exactly how these tax attributes would figure into any going concern sale.
The company said it formed a special committee to oversee the restructuring process that would “have decision making authority with respect to transactions involving affiliated parties.” The special committee is composed solely of independent directors, specifically, Alan Carr, Paul DePodesta, Ann N. Reese, and William Transier.
The company named Carr, a well-known advisor and attorney in the restructuring industry, to the board last week, setting off the intense media speculation about the company’s coming Chapter 11 filing. Similarly, the company noted that Transier “has extensive restructuring experience involving companies with complex capital structures and has served on special committees of independent directors responsible for overseeing restructuring processes.”
In terms of milestones, the company’s DIP provides that the company must file a reorganization plan and disclosure statement by Feb. 18, 2019, that the company obtain approval of its disclosure statement by March 25, 2019, that the company obtain confirmation of the reorganization plan by April 29, 2019, and that the plan become effective by May 14, 2019.
While these milestone deadlines should be treated with a large grain of salt at this point in the proceedings, given the reported desire of some lenders to see the company liquidated and the failure of the company’s prior restructuring initiatives to gain traction, it is worth noting that Riecker warns that “time is of the essence in these Chapter 11 cases.”
The company currently “burns a significant amount of cash—approximately $125 million per month—in the course of operating [its] business,” Riecker said, explaining that this burn rate “is due, at least in part, to the discrepancy between the company’s operational capacity, which can support a business of the company’s previous size, and the company’s current, reduced footprint that has resulted from its ongoing store closure initiative.”
Rieger said the company hopes “that this imbalance will be corrected through the purchase of the company’s viable stores, but in the meantime, these Chapter 11 cases must progress with all due speed to stem these substantial operating losses that will continue to decrease the value of the debtors’ estates.” — Alan Zimmerman
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