Sears CEO Suggests Plan to Save Business from Bankruptcy

Sears chief executive officer Eddie Lampert is pushing for his biggest move thus far to sidestep bankruptcy, with the coming running out of wiggle room as a large debt payment looms over it next month.

Lampert’s hedge fund, ESL Investments, is suggesting a way to restructure the struggling department store chain’s liabilities, in addition to asking Sears’ board to sell off around $1.75 billion worth of assets. This would decrease the retailer’s total debt by almost 80 percent to $1.24 billion, according to the documents that were filed Monday with the Securities and Exchange Commission.

Sears would also sell nearly $1.5 billion worth of real estate, much of which has been used as collateral in the past to generate a level of liquidity, as part of the proposal. Some of the stores in such a transaction would be leased back to Sears, according to the filing. Sears operated 866 stores under its namesake brand and Kmart as of August 4.

Lampert has a controlling ownership stake in the business and he personally owns around 31 percent of the retailer’s shares outstanding, while ESL owns about 19 percent. The CEO has been firmly stripping out assets to keep the company afloat over the past several years. It’s still unclear whether the company’s debt-holders will continue to support such efforts, which have basically resulted to restructuring outside of formal bankruptcy proceedings.

Those debt-holders must be persuaded that Sears is worth more than the current value of its assets – its real estate properties and its brands – despite its constant losses. For many, the longer Sears waits to file for bankruptcy, the steeper the decline of its assets.

“Indeed, had Sears been owned by anyone else it would have likely long since gone under,” said Neil Saunders, who is the managing director at GlobalData Retail.

The proposal comes as Sears risks breaching its debt covenant and faces a substantial payment of $134 million on October 15. ESL’s efforts laid out earlier this year to infuse cash into the company by selling the company’s storied Kenmore appliance brand and its home improvement business have been held by a special committee of the board of the company.

Meanwhile, after years of selling of various assets, the floundering retailer is at its final steps in what it can provide to lenders as collateral in a restructuring.

Some don’t believe that the CEO’s plans wills starve off further restructuring.

“Even if the restructuring as proposed – which Fitch views as challenging to execute – goes through, the company will continue to require significant liquidity injection given operating headwinds,” said Monica Aggawrwal, who is an analyst at Fitch Ratings.

Fitch said that it expects Sears’ annual liquidity needs to amount to over $600 million per year, with EBITDA expected to remain negative, in the $500 million to $600 million range, with ongoing cash interest expense of $88 million on top of “any modest working capital/capex needs.”

To help handle its liabilities, Sears has been working with investment bank Lazard, according to the people familiar with the matter. The boutique bank has a specialization in restructuring and bankruptcies, including the management of Toys R US liquidation.

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