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Sears Holdings May Prepare for Potential Request for Protection From Creditors, Report Says

Retailer Adds Restructuring Expert to Board as Advisory Firm Reportedly Hired
October 10, 2018
Retailer Sears Holdings has hired an advisory firm in advance of a possible request for protection from creditors, according to a report in The Wall Street Journal. Kyle Hagerty/CoStar

As another debt payment deadline looms, the clock is ticking on the future direction of Sears Holdings. All the signs are reportedly in place for a possible filing for some sort of protection from creditors by the retailer that once represented America's penchant for shopping and dominated shopping malls across the country.

The spinoff of its heritage Sears and Kmart properties into a separate real estate trust may be affected as the Wall Street Journal reports a potential request for bankruptcy protection could be filed as soon as this weekend and may disrupt immediate rent revenue Seritage Growth Properties collects and possibly its redevelopment of those properties.

The Hoffman Estates, Illinois-based merchant hired M-III Partners to start work on a bankruptcy proceeding ahead of a $134 million debt payment due Monday, The Wall Street Journal reported Tuesday. The boutique advisory firm's staff has been at the company's headquarters in recent weeks as Sears Holdings juggles options to keep the business as a going concern, the paper said.

Sears Holdings, which didn't respond to a request for comment, could stave off any potential bankruptcy while it considers other options or negotiates with creditors, according to the report. The firm operated 866 Sears, Sears Auto and Kmart stores as of early August, but that number is expected to drop with new closings.

The news came a day after Sears Holdings said it brought on a well-regarded restructuring expert as a board director. Alan Carr, chief executive and managing member of Drivetrain, a restructuring advisory firm, also has served on other boards that have gone through restructurings.

Sears Holdings credited Carr with significant experience as a principal, investor and adviser leading complex financial restructurings, according to the statement. He also was an attorney at Skadden, Arps, Slate, Meagher & Flom, and at Ravin, Sarasohn, Baumgarten, Fisch & Rosen.

Sears Holdings has also turned to consulting firm AlixPartners, lawyers at Weil, Gotshal & Manges, and investment bank Lazard to help keep the company out of bankruptcy court, according to The Wall Street Journal report.

But the company may need to do more, according to analysts who said Wednesday this week's moves if reports are true could lead to a bankruptcy filing ahead of the debt payment due date as the retailer seeks to position itself before the important holiday shopping season.

If it should even take such an action, it's unclear what kind of bankruptcy protection Sears Holdings might seek -- a Chapter 11 request could lead to a restructuring that would keep the stores open as the company renegotiates with creditors; Chapter 7 typically leads to liquidation as a means of paying off creditors. Companies that have declines in revenue and hold large debt often don't pursue a Chapter 13 bankruptcy petition, which is intended as a slow-but-sure payback to creditors.

Two weeks ago, Eddie Lampert, Sears Holdings' chief executive, largest shareholder and biggest creditor through his hedge firm ESL Investments, as well as Seritage's chief executive and top shareholder, pitched a series of deals that relied on the chain's commercial real estate, product lines and business services to shore up funds to substantially pare much of the roughly $5.59 billion in debt.

In a filing with the Securities and Exchange Commission on Sept. 23, ESL noted that "Sears now faces significant near-term liquidity constraints," and laid out a restructuring that included selling $1.47 billion in real estate, restructuring $1.12 billion with debtholders and selling another $1.75 billion in assets that would have included the Kenmore brand and the Sears in-home services business.

Citing the retailer's financial results, ESL urged the board to "act immediately," according to the filing. ESL wants to avoid bankruptcy because of the costs and limitations that one would impose.

However, a court-supervised bankruptcy would call for a plan of reorganization that would give investors an idea of how the company would attempt to return to profitability. Lampert's plan last month didn't offer one.

Seritage, which was formed in 2015 when Lampert created the real estate investment trust for a sale/leaseback arrangement of 235 properties and 31 joint-venture interests from Sears Holdings for $2.72 billion, warned investors the company is struggling in its latest SEC filing.

The REIT has taken a handful of those properties back to redevelop into mixed-use properties that mostly include fitness centers and dining and entertainment venues.

But in the filing, Seritage noted the rents Sears Holdings pays are significant. "The bankruptcy or insolvency of any of our tenants, particularly Sears Holdings, could result in the termination of such tenant’s lease and material losses to us," the company said in the filing. "In particular, a bankruptcy or insolvency of Sears Holdings, which is our largest tenant, could result in a loss of a majority of our in-place rental revenue and materially and adversely affect us."

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