Sears

It didn’t take long for the mudslinging to start in the Sears Holdings Corp. bankruptcy case.

The unsecured creditors committee was formed Oct. 24, and it fired its first salvo on Nov. 6 against hedge fund ESL Investments and its chairman Edward Lampert, who is also chairman of Sears Holdings, seeking expedited discovery on past deals. Then the committee on Monday objected to Sears’ request for court approval of planned sales procedures to sell the company as a going concern, stating instead that moving to a liquidation might be the better plan.

ESL fired back with a response late Tuesday, but this time it targeted two members of the committee — Simon Property Group and Brixmor Property — for allegedly stating that they want Sears to liquidate quickly. ESL lawyers stated that no other committee member has made a public statement calling for Sears’ liquidation.

At the outset, ESL in the court document claims the committee “is once again prejudging an outcome and unfairly targeting ESL.” The Committee also is trying to prevent ESL from credit bidding. ESL 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 a bid for the retailer.

But where it got ugly were references to earnings conference calls made by David Simon, chairman and chief executive officer of Simon Property Group, and James M. Taylor, ceo of Brixmor Property Group. Both Simon and Brixmor are real estate investment trusts, and landlords to many Sears stores.

ESL was quick to note an Oct. 25 earnings call this year when Simon said “Sears will no longer exist in 2019,” and that the Sears stores would be redeveloped and re-leased as indication for why Simon Property would be quick to push for a liquidation.

But a review of the conference call indicates that the stores Simon was referring to are sites that Sears has either closed or said would be closed, and that the REIT would be redeveloping the sites that it has been able to reclaim. And while Simon did say during the question and answer period that Simon is “planning for the ultimate, unfortunate demise of Sears,” that seemed to be more in the context of assuring analysts and investors that REIT has the financial wherewithal — and staffing needed — to determine how to make the best use of whatever sites its gets back. He pointed out that of the 29 stores still in operation within its portfolio, 17 are owned by Sears and said “we’ll have to wait and see what happens [to] whether they’ll continue to operate those or not.”

Similarly, ESL was quick to point out Taylor’s statements on his Oct. 30 earnings call about how Brixmor would “capitalize” on the opportunity to “evict Sears” and upgrade its centers. But Taylor’s comments during his call seems more in line with a ceo looking at how to reduce its Sears exposure through either dispositions or a recapture of the space in order to re-lease the sites. And a typical way REITs upgrade centers is through a better mix of tenants, and that often translates to higher rents. He said the company expects to recapture nine of the 11 locations in its REIT portfolio, noting that the “timing of the Sears-Kmart unwind came a few quarters earlier than we had anticipated.” He also said later in the call that Brixmor “didn’t expect Sears-Kmart to happen when it did, but we certainly expected it to happen. And we expect other disruptions to occur.”

ESL did acknowledge that it is planning a going concern bid for Sears and is “working around the clock with potential lenders seeking to finance a bid, with potential partners to structure a bid, conducting necessary diligence and building the business plan that will support a going concern bid.”

Meanwhile, different constituency groups are expected back at the bankruptcy court in White Plains, N.Y., on Thursday. A number of different motions are on the agenda, including the procedures to sell the company and financing.

Of concern to many is whether Sears is able to secure additional financing to keep the operation ongoing. That’s because of the monthly cash burn rate of $125 million, as stated by Sears in earlier documents filed in the case, and the fact that it only received $300 million in debtor-in-possession financing from existing lenders. Sears was hoping to secure a $300 million junior DIP facility, but that seems up in the air.

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