Sears CEO proposes restructuring plan to avoid bankruptcy

Sears CEO Eddie Lampert is making his biggest push to avoid bankruptcy, with the company running out of time with a large debt hanging over its head next month.

Lampert’s hedge fund, ESL Investments, is proposing a way to restructure the troubled department store chain’s debts, in addition to asking Sears’ board to sell off valuable assets. about 1.75 billion USD. This would reduce the retailer’s total debt by nearly 80% to $1.24 billion, according to documents filed Monday with the Securities and Exchange Commission.

Sears will also sell $1.5 billion worth of real estate, much of which has been used as collateral in the past to create liquidity, as part of the proposal. Some of the stores in such a transaction would be sublet to Sears, the filing said. Sears has operated 866 stores under both the eponymous brand and Kmart since August 4.

Lampert, who has a controlling stake in Sears, personally owns about 31% of the outstanding stock of the retailer, while ESL owns about 19%. The CEO has been steadily getting rid of assets to keep the company alive over the past few years. It is unclear whether current Sears founders will continue to support these efforts, which have effectively supported restructuring outside of formal bankruptcy proceedings. Those stalwarts had to believe that Sears was worth more than its assets—namely its real estate and brand—even though it was consistently losing money. The longer Sears waits to file for bankruptcy, the more its asset value is said to decline.

“Indeed, if Sears were owned by anyone else, it could have long since disappeared,” said Neil Saunders, chief executive officer of GlobalData Retail. GlobalData Retail.

The proposal comes as Sears is at risk of breaching its debt covenants and faces a substantial payment of $134 million by October 15. ESL’s efforts come early. This year to pour cash into the company by selling its longstanding Kenmore appliance brand and its home improvement business was organized by a special committee of the board. Meanwhile, after years of selling off certain assets, including Craftsman and real estate to keep the company alive, the retailer is on the final step of offering what it can offer. to lenders as collateral during restructuring.

Some don’t think Lampert’s plan will prevent further restructuring, forever.

“Even if the proposed restructuring – which Fitch considers difficult to execute – is carried out, the company will continue to require a substantial liquidity injection amid the backdrop of the crisis,” said Fitch Ratings analyst Monica Aggawrwal. tough operating situation,” said Fitch Ratings analyst Monica Aggawrwal.

Fitch said it anticipates Sears’ annual liquidity needs of more than $600 million per year, with EBITDA expected to remain negative, in the $500 million to $600 million range, with interest expenses on loans. ongoing face of $88 million plus “any modest capital/investment needs.”

To help manage his debt, Sears worked with investment banking , people familiar with the negotiations told CNBC. The boutique bank has expertise in restructuring and bankruptcy, including managing the liquidation of Toys R Us.

Lazard declined to comment.

In a letter to the special committee earlier this year, Lampert asked the board to contact Sears’ losers to assess their views on the restructuring.

It is not yet clear whether the tops will agree with ESL’s latest proposal, but the hedge fund said on Monday that it would be best to take these “as a regular concern, rather than a matter of concern.” as alternatives would significantly reduce, if not completely eliminate, value for shareholders.”

ESL’s goal is for the department store chain to refinance its $1.1 billion debt that is coming due within the next two years. Sears currently has about $5.5 billion in debt.

“ESL’s proposal is designed to help create enough runway for Sears Holdings to continue its transformation and return to profitability for the benefit of many stakeholders,” ESL President Kunal S. Kamlani said in an email. CNBC.

He said the board should work with the hedge fund or “come up with sensible alternatives.”

Sears earlier this month reported a net loss of $508 million for the quarter, as sales fell by double-digit percentages. Adjusted loss before interest, taxes, depreciation and amortization increased to $112 million, compared with a loss of $66 million in the same quarter a year earlier. Sales at stores open for at least 12 months also fell 3.9% in the second quarter.

At the time, Lampert sounded the alarm about potentially dire consequences if the company failed to restructure its debt load or secure special committee approval for the sale. outstanding assets.

“Given the speed and results to date from our asset monetization efforts, it is imperative for the company to reduce debt, adjust its debt maturity profile, and eliminate associated cash interest obligations.” Lampert wrote. “We continue to believe that it is in the best interest of all our stakeholders to take this as a regular concern, rather than as alternatives that could lead to a significant reduction in value.” .”

Sears appointed a special committee earlier this year to balance the potential conflict of interest inherent in ESL’s bid for Kenmore and the home improvement business. A source familiar with the matter told CNBC that the commission has frustrated Lampert with its slow pace.

The source added that the commission has been talking to other potential buyers to see if they can get a higher offer.

The special committee’s conundrum was amplified by the predicament faced by the Pension Benefit Guarantee Corporation, the federal government watchdog that secures individuals’ pensions and has the right to Kenmore’s intellectual property mortgage.

Shares of Sears, which many years ago traded above $140, recently hit an all-time low of $1.07. Shares were initially up more than 20 percent Monday morning but have recently dropped more than 7 percent at around $1.18. Sears’ market capitalization is currently just around $131 million.