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What you need to know about Sears’ bankruptcy filing

October 13, 2018 GMT

Sears Holdings Corp., one of America’s most iconic retailers, is said to be planning to file for bankruptcy as early as this Sunday. Negotiations over the fate of the fallen company have been continuing this week, as it faces a critical $134 million of debt that is maturing on Oct. 15.

Scenarios for the disposition of the company

As of Friday afternoon, the company and its creditors were still hammering out the details of a bankruptcy plan. Sears is weighing a traditional Chapter 11 reorganization, which would allow the company to get through the crucial holiday season and build cash before it faces the next wave of bills. Negotiators are discussing a loan of about $300 million to $500 million.

Eddie Lampert, Sears’s chief executive officer and largest shareholder, may also look to sell some of the company’s assets in bankruptcy — possibly to himself. He’s explored using his hedge fund to buy the store’s Kenmore and Sears home improvement businesses.

In the event that reorganizing fails, Sears may end up having to liquidate. That scenario would see Sears auction off most of its assets.

The chain, which comprised 863 mall-based stores and an additional 1,200 retail locations in the year 2000, had 866 Sears and Kmart stores as of Aug. 4 and expected to close 149 of them in the second half, according to a Sept. 13 filing.

Financing during bankruptcy

Since 2012, Sears losses have topped $10 billion. This past week, Sears took a number of steps to prepare for the filing, including hiring a boutique advisory firm, naming a new restructuring expert to its board of directors and negotiating a possible bankruptcy loan. Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. are potential providers of a loan in bankruptcy, according to people with knowledge of the matter, since they’re behind the company’s existing asset-backed loan.

It’s still unclear whether Lampert, who became chairman and CEO in 2013, will use his own money to keep Sears afloat, something he has been doing for years to offset losses. He done so through deals and infusions from his hedge fund, ESL Investments Inc., which is the retailer’s biggest equity holder and a major debt holder.

Fate of employees

Sears employs about 89,000 people and their fate remains uncertain. A bankruptcy could trigger one of the biggest pension defaults in the U.S. as Sears employees’ pension has gone underfunded for years. Last month, Lampert said that Sears had been “significantly impacted” by paying more than $4.5 billion for its pension plans since 2005. In either scenario, Sears would probably jettison its pension obligations, with the government’s Pension Benefit Guaranty Corporation taking over the liabilities.

Kmart, real estate and other satellite companies

The fate of Kmart, which Lampert merged with Sears in 2005, and other satellite companies such as the Kenmore appliance brand, is also up in the air.

Before bankruptcy seemed inevitable, Lampert’s hedge fund ESL had been pushing a debt-restructuring proposal that would avoid a bankruptcy filing. It involved selling Sears’s real estate to help pay down borrowings. Other creditors criticized the plan as a maneuver for ESL to extract value before insolvency hit.

Seritage Growth Properties, part of a real estate investment trust spun off by Sears in 2015 with the leases on 230 properties operated by Sears or its Kmart division, is also 44 percent-owned by Lampert entities. With Sears heading toward bankruptcy, any potential for liquidation could mean an end to the lease agreements with Seritage.

Because Seritage collects rent on the properties, and those payments flow to Lampert through dividends, Sears’s bankruptcy could raise arguments that some payments should be clawed back by creditors. Bankruptcy law allows creditors to argue that money moved out of their reach in the period leading up to a bankruptcy was unlawfully transferred – if they can show the company was already essentially insolvent. The fact that Lampert owns so much of Sears debt, and is also a beneficiary of rent payments through Seritage, may constitute a conflict in any talks about whether to immediately liquidate.


Keeping shelves full and sales stable could become a determining factor in avoiding liquidation and helping creditors determine whether they want to keep throwing money into the company. As Sears’s liquidity tightens, the company has been struggling to meet its obligations for some vendors.

Still, some suppliers said they negotiated favorable payment terms well ahead of news that it could file for bankruptcy, so they’re continuing to ship goods. Many large suppliers are getting paid in advance, while some smaller ones have cut payment terms to a few weeks, instead of months, according to people familiar with the situation, who asked not to be named because the dealings are private.

Vendors are considered unsecured creditors in the case of a bankruptcy and would only get pennies back on the dollar in bankruptcy court.

What happens to competitors if Sears fails

The struggling retailer has been losing market share for years, but its Kmart and Sears chains still generate about $14 billion in annual sales. If the company ultimately files for bankruptcy and liquidates its locations, companies like J.C. Penney Co., Best Buy Co. and Lowe’s Cos. will reap the rewards.

One of the biggest prizes could be appliances, a category where Sears was still a major player and was on pace to generate $3.5 billion in sales this year, according to UBS Securities. That could boost same-store sales at many chains. Home goods and sporting goods retailers are likely to also benefit.