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A group of
Sears Holdings
Corp.’s
creditors are questioning whether the retailer’s best move is to go through a sale process for its 400 most-profitable stores or instead cut its losses and liquidate sooner rather than later.
The committee of unsecured creditors in court papers filed Friday raised concerns about the sale process. The group called the business plan to keep stores open “wishful thinking,” since Sears would need to reduce its excessive expenses to return to profitability, which the company was unable to do leading up to the bankruptcy filing.
In addition, the group fears the sale process may be costlier than the company has disclosed and will subtract from the recovery to creditors and other stakeholders.
When the troubled retailer sought chapter 11 protection in October, Sears said it hoped to reorganize around its most-profitable stores.
There are roughly 400 Sears and Kmart stores earmarked for the sale process, and an auction has been proposed for January. The sale process must be wrapped up no later than Feb. 8, due to a sale timeline put in place by some bankruptcy-loan lenders.
A Sears spokesman did not respond to a request for comment.
“A successful sale of these viable stores as a going concern not only will save Sears and Kmart, but also the jobs of tens of thousands of employees,” said Sears Chief Financial Officer Robert A. Riecker in earlier court papers.
At its peak, Sears had more than 2,300 stores, the result of former Chief Executive Edward Lampert’s merger of Sears and Kmart in 2004. The number had fallen to less than 700 stores as of the bankruptcy filing. The company had about 68,000 employees when it filed.
When it filed for bankruptcy, Sears said it would close 142 unprofitable stores near the end of the year, in addition to 46 stores expected to close this month. Last week the company said in court papers it would close an additional 40 stores.
Although the creditors “commend” Sears’s effort to stay alive, the group questions whether it is feasible and whether it is the best path forward for the estate and creditors.
“The creditors’ committee remains unconvinced that the going concern sale process is a prudent use of [Sears’s] dwindling resources,” the committee said in court papers Friday.
The creditors estimate the sale process will cost between $375 million and $500 million, based on a cash burn of $125 million per month, plus the need for additional bankruptcy financing.
Sears has been in negotiations to obtain additional bankruptcy financing for weeks. When the company filed for bankruptcy protection, it lined up a $1.83 billion bankruptcy loan, the bulk of which pays off existing loans and includes $300 million in new money. The financing is being provided by bank lenders including Bank of America NA,
Wells Fargo
& Co. and Citibank NA.
But the retailer has been in discussions to obtain additional financing. Initially, the company said in court papers it was in discussions with Mr. Lampert’s ESL Investments Inc., Sears’ largest creditor, for additional financing.
The structure of the bankruptcy financing is likely to change, as Mr. Lampert is no longer expected to take part in the financing, people familiar with the situation said. Instead, hedge funds and private-equity firms, including Cyrus Capital Partners LP, are expected to provide an expanded junior bankruptcy loan, and the banks will slim down their position in the debt, the people added.
Since the discussions are ongoing, the company has once again pushed out the hearing to seek approval of the bankruptcy financing package. Sears will appear in court Thursday to seek permission to move forward with its sale process and other matters, and is slated to return on Nov. 27 with a proposed new bankruptcy loan.
Mr. Lampert was said to have stepped away from the bankruptcy loan to focus his efforts on putting together a so-called stalking-horse bid for as many as 500 Sears stores and other assets, including the Kenmore brand, one of the people said. The proposal would likely consist of cash and forgiveness of some of the $2.6 billion in debt ESL holds, the person added.
The company must nail down a stalking-horse bidder, which would set the floor at an auction, by Dec. 15.
Separately, the creditors are looking to investigate past transactions between ESL and Sears. They allege the firm may have used its insider status to obtain a larger position of Sears’s debt in order to “siphon away value” and “exert undue influence” in connection with the bankruptcy filing. The committee is seeking approval to obtain more documents from ESL in order to complete an investigation.
Mr. Lampert’s firm has denied the allegations in court papers, calling them an “attempt to poison the well against ESL.”
—Suzanne Kapner contributed to this article.
Write to Lillian Rizzo at [email protected]
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