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Sep 24, 2018

Lampert hopes Sears can stave off bankruptcy with real estate sales, debt restructure

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Sears Holdings Corp. (SHLD.O) is reviewing a proposal by Chief Executive Officer Eddie Lampert to keep the retailer alive by restructuring its debts and selling real estate.

Plans outlined in regulatory filings Monday include cutting debt by about 78 per cent to US$1.2 billion and extending near-term maturities, with annual interest savings of 80 per cent. The proposal came from ESL Investments Inc., the hedge fund controlled by Lampert, who ranks as the largest Sears shareholder.

ESL painted a dire picture of the chain’s precarious financial condition, saying “Sears must act immediately” on a financial overhaul. It would be better to put something in place “as a going concern, rather than alternatives that would substantially reduce, if not completely eliminate, value for stakeholders,” ESL said.

Lampert has been using his own money for years to keep Sears from collapsing as its customers defect and sales fall. The 125-year-old retailer, based in Hoffman Estates, Illinois, has relied on piecemeal deals and infusions from the hedge fund manager to offset billions of dollars in losses. It also closed hundreds of stores and cut more than US$1 billion in expenses.

Lampert and ESL acted after watching other retailers including Toys “R” Us Inc. and Bon-Ton Stores Inc. wind up in liquidation, according to people with knowledge of the plan. The aim is to get something done out of court to preserve value for shareholders, since they don’t usually fare well in bankruptcy proceedings, said the people, who weren’t authorized to comment publicly and asked not to be identified.

“It seems the next natural iteration of all the financial engineering the company has been engaging in over the last few years,” Bloomberg Intelligence analyst Noel Hebert said. “For non-bank creditors not named Eddie Lampert, there is a bit of prisoner’s dilemma -- maybe something more tomorrow, or the near certainty of very little today.”

Sears’s board said it told the chain’s executives and advisers to pursue the ideas in ESL’s filing. The shares fell 6.7 per cent to US$1.19 at 12:23 p.m. in New York, while the company’s bonds were little changed.

Debt Swap

The plan calls for owners of certain second-lien and unsecured debt to swap their holdings for zero-coupon convertible debt. Some aspects would wind up diluting stockholders, according to the filing, which envisions proceeds from real estate sales being used to repay certain lenders and ESL.

“This is simply storing up trouble for the future,” according to a note from Neil Saunders, managing director of research firm GlobalData Retail. “Sears is focusing on financial maneuvers and missing the wider point that sales remain on a downward trajectory,” he wrote. “Even in a strong consumer economy, customers are still drifting away to other brands and retailers.

Sears “now faces significant near-term liquidity constraints,” accord to ESL’s filing, including debt maturities on Oct. 15 and reserve requirements on Oct. 1. The dates were mentioned as guideposts to spur quick action from the board and stakeholders, but nothing in the proposal says it needs to be complete before then, according to one person with knowledge of the plan.

Lampert’s ESL is working with Moelis & Co. as financial adviser and Cleary Gottlieb Steen & Hamilton as legal counsel, according to the filing.