There are indications that Sears Holdings Corp. is hitting a time crunch in which its future could be determined even before the holiday season starts.
The initial plan for Sears after its Chapter 11 filing was to get inventory into the stores, have a good holiday season and work with its constituency groups on a collaborative plan of reorganization. That just might have been wishful thinking on the part of Sears and its chairman Edward S. Lampert.
As WWD reported on Tuesday, finances and inventory are the two key concerns of several credit analysts. They’re of the opinion that the company eventually ends up in liquidation mode. As one finance executive said, “Sears needs to work fast. Even if they have a plan they think is workable, will the creditors and lenders go for it? That’s a different story.”
Of concern now is the company’s cash-burn rate and possible inability to quickly secure additional financing. On Wednesday, Sears received bankruptcy court approval to postpone its Nov. 1 hearing on post-petition financing.
Sears filed for Chapter 11 bankruptcy court protection Oct. 15. It has a monthly cash-burn rate of $125 million. The company received an incremental increase of $300 million from existing lenders — its main debtor-in-possession financing facility — as part of its first-day orders in the case. But most of that funding is needed to fund the bankruptcy, such as paying administrative costs and professional fees.
Sears needs additional funding to pay for day-to-day operations, as well as secure inventory. It’s been in talks with ESL Investments, the hedge fund run by Lampert, who is also the fund’s chairman. ESL holds a significant stake in Sears. The talks are for a $300 million junior DIP facility, although Lampert is believed to be reaching out to other potential investors. He’s also said to be pushing for certain guarantees for the junior financing arrangement, a move that’s likely to be met with criticism from lenders and creditors.
One key obstacle in getting new financing could center on what the assets are that Sears has left that can be used as collateral. Court documents said most of its assets are encumbered.
On Wednesday, an unsecured creditors committee was formed. Sources said Thursday there are indications that the committee was close to hiring Akin Gump Strauss Hauer & Feld as its counsel in the Sears bankruptcy case. The law partners at the firm could not be reached for comment at press time. The firm’s bankruptcy practice is widely regarded for its work in representing unsecured creditor groups. One source told WWD that hiring the firm means the committee is likely gearing up for possible “fraud claims” as creditors try to claw back on some of the transactions engineered by Lampert.
Many credit professionals believe that unsecured creditors are not likely to get anything, not even pennies on the dollar, on their claims.
Credit analysts have good reason for not being optimistic about where the Sears bankruptcy is headed. They noted that the retailer’s key lenders weren’t keen on even the $300 million incremental loan, emphasizing that before the Chapter 11 filing the lenders were pushing Sears toward a liquidation. The fact that the Nov. 1 adjournment was done without a replacement date and time in place also did not sit well with some of the finance executives. One individual said Thursday, “This is not good. One thinks that the reason is they can’t get the financing lined up.”
Sears walked into the bankruptcy with at least $193 million in its cash balances, excluding the $248 million deposited in escrow for its pension plans, plus the cash accrued from not paying vendor bills for the two weeks before the filing. It also “expects” to net $42 million from going-out-of-business sales at the 142 stores that are being shuttered. And Sears has said it can close more stores to collect more cash from the going-out-of-business sales at the shuttered stores to contribute funding to existing operations.
Factors earlier this week told WWD they have clients who are staying away from any shipments to Sears. One big concern, especially for those who were hurt by the nonpayment of pre-petition invoices, is that they don’t want to get caught up in a liquidation and get less back compared to the value of the goods shipped, said one individual who checks the retailer’s credit before giving clients a “yay” or “nay” on whether to ship to Sears.
Typically, Sears does “well” during the holiday season. According to one factor, “well” for Sears means it makes its margins and that sales are at least flat to up slightly. While a Sears filing at some point was expected, the problem this year is that the bankruptcy filing came sooner than most expected. Many thought it wouldn’t happen until some time next year. It’s that surprise that has some concerned that Sears and Kmart have limped into their last holiday selling season. That doesn’t give suppliers any confidence to keep selling to the company.
There’s another problem that’s related to inventory: In court documents, the company said it doesn’t have any long-term agreements with suppliers. That means orders for goods are placed as needed.
Finance and industry executives said orders now for goods likely leave Sears obtaining product that’s left over and still available for shipment. They are referring to lines other retailers didn’t want, or lines created for orders that were later canceled by another retailer.
One credit analyst said that scenario suggests a “hodgepodge” collection of disjointed goods on the sales floor. If there’s no one thinking ahead about what to order and where to place the goods, the sales floor will look unappealing to shoppers, the individual explained.