[co-author: Samuel Kwak, Law Clerk]
Started as a mail-order retailer, evolved to brick-and-mortar stores in urban areas and expanded to a big-box retailer through merger, Sears is now facing the most turbulent time in its history. On October 15, 2018, Sears Holdings Corp.—the holding company of Sears and Kmart—along with its affiliated entities, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. With assets of approximately $6.94 billion and liabilities of approximately $11.34 billion in total,[1] the fate of “Where America Shops” remains unclear.
Details provided by Sears in its first day declaration confirmed what many have suspected for years: that a Chapter 11 filing was inevitable. Facing increasing competition from online and big box behemoths like Walmart, Target, and Amazon, Sears has struggled to remain competitive on price or merchandise selection. Liquidity has been one major issue: operations have cost Sears $125 million in cash per month. Another $440 million per year goes to cover interest. Allowing Sears to keep operating, the Bankruptcy Court has granted interim approval for the Debtors to obtain approximately $300 million in DIP financing funded by the company’s existing secured lenders. The Debtors will seek authority for total DIP financing in excess of $1.8 billion at a final DIP hearing scheduled for November 15.
Looking ahead, one of the biggest challenges Sears will face is the disposition of its retail locations. Sears plans to sell about 400 of its most profitable stores through a Section 363 sale. Currently, the Debtors are in discussion with ESL Investments, the hedge fund controlled by Sears Chairman Eddie Lampert that owns 49.7% of Sears Holding, regarding a stalking-horse bid for those stores. At the same time, Sears intends to promptly close 142 stores that have been sustaining significant losses without any leasehold value to monetize. Given that no buyer has expressed any interest in these stores yet, the Debtors would likely have to liquidate them, through which it expects to generate net proceeds of approximately $42 million. In addition, the Debtors intend to sell its non-core assets, including intellectual property and specialty businesses.
In addition to the real estate issues expected to be at the forefront of the restructuring, the Debtors will face other challenges, too. Sears’s pension plans are underfunded by about $1.5 billion, suggesting a significant role in the case for the Pension Benefit Guaranty Corporation (“PBGC”). Sears will also face difficult choices regarding the future of nearly 70,000 employees. Relationships with vendors will also be key: anticipating bankruptcy, many suppliers contracted trade terms or otherwise limited their exposure to the struggling retailer.
The fate of Sears will depend on how it navigates these and other challenges in bankruptcy. Daniel A. Lowenthal, Chair of Patterson Belknap’s Business Reorganization and Creditor’s Rights Practice, predicted to the LA Times that if Sears survives, “we will see a smaller number of stores and a better internet presence”; “if not, we’ll see another U.S. retail liquidation.”[2] Further insights from Mr. Lowenthal can be found here.
[1] Declaration of Robert A. Riecker Pursuant to Rule 1007-2 of Local Bankruptcy Rules for Southern District of New York at 18, In re Sears Holding Corp., et al., No. 18-23537-RDD (Bankr. S.D.N.Y. October 15, 2018).
[2] James F. Peltz, Bankruptcy gives Sears the opportunity to stay alive, its chairman says, LA Times, Oct. 15, 2018, http://www.latimes.com/business/la-fi-sears-reorganization-20181015-story.html.
