The tailspin at Sears Holdings Corp. is getting more dire by the day as talks begin to surface of lenders pushing for a Chapter 7 liquidation.
One executive at a liquidation firm summed up the crisis as follows: “This isn’t just a Chapter 11 bankruptcy with hopes of a reorganization. Whenever there’s talk about a Chapter 7 filing, that is very drastic. It means [the lenders] want to throw out management.”
According to this liquidation executive, the vote of no confidence can be attributed to Sears chairman and chief executive officer Edward S. Lampert. “Many people don’t like him. They think that he doesn’t care about putting people out of work,” he said.
This individual was referring to the 3,500-plus stores in existence under the Sears and Kmart nameplates in 2005 when Lampert merged Kmart with Sears, Roebuck & Co. in a transaction valued at $11 billion, with projections of annual volume of $55 billion. The last profitable quarter Sears posted was in 2010. Today it operates fewer than 866 locations. In the last few years, the company has been closing stores by the hundreds.
While a perfect storm comprising the 2007 financial crisis and a shift in consumer shopping habits to online has hurt Sears as much as other retailers, Lampert has been criticized for not having a merchant who could bring in the product mix that its customers might want. Lampert also has been criticized for focusing too much on extracting value from Sears’ assets when he should have been focused on investments in the stores, according to naysayers. The Sears chairman over the years has ejected different businesses and assets from Sears’ portfolio, such as spinning off Lands’ End, moving its key company-owned brands — Craftsman for tools, Kenmore for appliances and Diehard for automotive batteries — into a bankruptcy-removed holding company and selling Craftsman to Stanley Black & Decker, and transferring via a sale of its best stores to Seritage Properties to form a real estate investment trust.
The various financial maneuvers have been criticized as a slow stripping of the company’s asset base. Lampert has said he’s needed to raise cash to keep Sears afloat and fund its “transformation” into an integrated retailer through a membership program called Shop Your Way. The Sears chairman, who also wears the hats of chairman and ceo at ESL Investments, has even used his hedge fund to provide short-term loans to keep Sears in operation as a going concern. And while Lampert can say that the terms were favorable to Sears on the one hand, ESL on the other hand was also receiving interest payments on the loans.
Many industry executives, from the retail, real estate and vendor communities, for years have expected a Sears bankruptcy at some point in time, though just not now. The expectation was that with ESL providing bailouts Sears likely would be able to get through one more holiday season. Distressed retailers on the verge of a filing typically will try to do anything to hang on until after Dec. 31 so they can take the cash from holiday sales to build their coffers to help fund their bankruptcy. However, with a $134 million debt payment due on Monday, and an ESL bailout proposal in the works since the summer that seems to be going nowhere, it appears that Sears could be running out of options.
Shares of Sears continued their decline Thursday as indications suggested an imminent bankruptcy filing before the weekend is over. Investors on Thursday sent shares of Sears down 29.7 percent to close at 34 cents in Nasdaq trading.
The market capitalization for Sears is just $37.3 million, based on its current stock price. One industry executive put that in perspective by stating, “The company’s real estate and its Kenmore brand is worth more than the company itself.”
In fact, Lampert’s ESL bailout plan has ESL proposing to buy $1.47 billion in Sears assets that includes its Kenmore brand and the Sears home improvement and services businesses. The hedge fund pegged the value of Kenmore back in August at $400 million.
While sources said there are different options still being discussed, and the possibility exists that Lampert could still pull a so-called Hail Mary financing plan to keep Sears from a bankruptcy filing, liquidators have been doing their diligence for weeks now. Mostly it has been in anticipation of more store closures.
Liquidation firms are now talking about how to handle the disposal of the Sears and Kmart store locations, as well as inventory in a going-out-of-business sale. With several hundred stores still in operation, a GOB sale would be considered massive, and likely accomplished through a consortium of liquidators. One executive told WWD that usually there is a guarantee of a percentage going to the debtor’s estate, with the liquidation firm eating the loss if it can’t make that guaranteed percentage. In this case, the firms are likely going to work on a fee basis because of the size of the bankruptcy and the risk that “eating the loss could translate into billions,” the executive said.
As for the remaining store locations, one real estate executive said no one really knows how many are profitable, or if that means that a store Sears claims is doing well could be “just marginally” profitable. There were even rumblings earlier in the year that Amazon might have been kicking the tires at the possibility of acquiring some big boxes and converting them to warehouse locations. One retail owner has indicated to WWD that he’s been keeping tabs at a few locations with an eye toward converting space to a different retail concept that includes event planning.
As the idea of the Sears operation leans toward an unwinding of the business as a going concern, the appointment of a Chapter 7 trustee — if lenders get their way — could bring new headaches for Lampert.
The liquidation executive believes a total liquidation of Sears in its current format is a strong possibility. “No one is fooling around with this one….It’s rare that you see a forced Chapter 7 by lenders. And I predict there will be lawsuits like you have never seen before,” this individual said.
Patrick Dinardo, a partner at Sullivan & Worcester, said a Chapter 7 liquidation would mean recent transactions — real estate transfers and other financial maneuvers to keep Sears afloat — would be more carefully scrutinized. That’s because a Chapter 7 entails the appointment of a trustee and the fiduciary duty to make sure creditors are treated fairly.
Some creditors are likely to attempt what is called clawbacks. In bankruptcy parlance, that translates into trying to get certain transactions undone to get more money into the estate to pay claims. There are also rules under the federal bankruptcy code regarding look-back periods for transactions. The period for insider preference treatment is one year, but the attorney said an allegation of a fraudulent conveyance has a look-back period of two years, and possibly longer under various applicable state laws.
The timelines invite closer scrutiny of the structure of many of Lampert’s deals as creditors push for a better return on their claims. According to Dinardo, it wouldn’t be necessary for a trustee to show actual fraud, just that someone got a benefit that others didn’t get. What’s necessary is that someone got “something for less than fair value and that, at the time, the entity was considered bankrupt by the transfer or was rendered insolvent by the transfer,” the lawyer said.