The expectation has been that hedge fund ESL Investments would likely become the stalking horse for the assets of Sears Holdings Corp., but now it might see competition from Great American Capital Partners.

Great American is the company that is providing Sears with a $350 million junior debtor-in-possession financing facility. The parties are awaiting court approval of that loan.

ESL is controlled by hedge fund manager Edward S. Lampert, who is also chairman of Sears. It was Lampert who — through ESL — bailed out Kmart Corp. when it was in bankruptcy, and then effected the merger of Kmart with what was then Sears, Roebuck & Co. to form Sears Holdings. Sears filed its voluntary Chapter 11 petition on Oct. 15.

ESL has already stated that it plans to credit bid for Sears. The hedge fund holds $2.6 billion in secured debt owed to it by Sears, and a credit bid would allow the hedge fund to use the dollar value of its credit claims as part of the bid for the retailer. That benefits ESL because it means it will need to bring less financing to the table. The hedge fund earlier this month told the bankruptcy court in White Plains that it is “working around the clock” with potential lenders and potential partners to structure a going-concern bid.

The U.S. bankruptcy code allows credit bidding, even as creditor groups tend to oppose them because of the lower cash component of the bid. The expectation has been that ESL would easily become the so-called “stalking-horse bidder” that provides the baseline amount for the court-approved auction.

Of course, there was never any guarantee that even if ESL became the stalking horse that it would prevail and own Sears. That’s because liquidators are also circling around the retailer to put in their own bids. Depending on how the math works out, the components of Sears could be worth more than the company as a whole. Such a scenario would provide more assets to distribute to Sears creditors, which is one reason why they have been pushing for a liquidation of the company. But unless the totality of the bids for the components are significantly higher, bankruptcy courts tend to favor going-concern bids since that typically keeps the company in operation and helps to preserve jobs. In the case of Sears, it has about 68,000 employees who would lose their jobs if the retailer were to head to the retail graveyard.

What’s new — and what could give ESL an unplanned headache — is the possibility that the proposed junior DIP lender also could credit bid for the bankrupt company.

According to financial documents among the lenders, both the senior lenders — Bank of America and Wells Fargo — and Great American have the ability to credit bid. In this case, the option helps them protect their interests and collateral. Industry executives haven’t really expected Bank of America and Wells Fargo to use their option. And while Great American has not said that it would join the bidding, the fact that it has preserved the option coupled with past examples where it has been opportunistic creates a different expectation. In the Sears bankruptcy, Great American can credit bid after it gets the bankruptcy court’s nod on the junior DIP facility, provided it meets certain requirements, such as getting consent from the senior lenders.

Great American is owned by B. Riley Financial Inc. B. Riley, which also serves as a financial adviser to many firms in the industry, has another affiliate called Great American Group that frequently partners with other liquidators to sell store equipment and work with retailers on their going-out-of-business sales. However, the finance arm itself has been somewhat active with opportunistic plays. A Great American spokeswoman could not be reached for comment.

In 2015, The Wet Seal inked a $20 million DIP facility with B. Riley when it filed for bankruptcy court protection. The contemplated plan of reorganization converted the $20 million into newly issued common stock of the restructured firm, which would have given B. Riley an 80 percent stake in the reorganized firm. But that plan was also subject to both bankruptcy court approval and a court auction. While B. Riley was recognized as the stalking horse, it was an affiliate of Versa Capital Management that was selected as the successful bidder for the teen retailer.

In the case of Bebe Stores Inc., the specialty chain connected with Great American for a $35 million loan agreement so it could make payments to landlords while it awaited the sale of a distribution center and a design center as the company transitioned to an online-only business. Earlier this year, B. Riley converted an existing $16.9 million loan with Bebe into 2.8 million shares of common stock. It also acquired an additional 250,000 shares, which in total gave the financial firm a 29 percent stake in Bebe’s business.

Separately, court documents revealed a proposed budget for Sears that was essentially a cash flow forecast as part of the loan documentation. The Unsecured Creditors’ Committee summed up Sears’ budgetary requirements beyond the senior and junior DIP facilities as the retailer needing incremental financing totaling $239 million for the period between the week ending Jan. 19 through Feb. 16 for a “going-concern sale of 505 stores.”



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