Finances and inventory are two of the key concerns for many credit analysts.
While Sears has received an incremental increase of $300 million from existing lenders, most of that funding is needed to fund the bankruptcy itself, such as paying initial administrative costs and professional fees. After those initial costs, there’s not a lot of financial wiggle room left to help with operational costs. That’s why Sears is in talks with ESL Investments, the hedge fund run by Sears chairman Edward S. Lampert, who holds the same post at ESL, for an additional $300 million junior debtor-in-possession facility. A Sears spokesman declined comment on the status of the talks.
According to Sears in court documents, the junior DIP facility would help supplement cash needs for ongoing operations. The talks with ESL are believed to be still ongoing. ESL is said to have had some discussions with Cyrus Capital Partners over a possible contribution to the junior loan. Cyrus, which is believed to be a holder of some of Sears’ debt, is a note holder of debt issued by the Asian operations of Toys ‘R’ Us. Cyrus Capital said on its website that it is a “deep value-focused” investor experienced in legal and process-oriented opportunities. That means it is an experienced distressed investor familiar with bankruptcy proceedings and restructurings.
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. But it needs more funding to provide vendors with confidence that it has enough cash to pay for goods shipped to the company. That concern is one that some credit analysts said is a key concern of its vendor clients.
Some credit analysts believe the company might have a two- to three-month window of opportunity at most for vendors who ship goods, but aren’t so optimistic about the long-term time horizon for Sears and Kmart.
And one financing executive who checks the company’s credit lines to give a recommendation on whether a vendor client should or shouldn’t ship said Tuesday that many of his clients have elected not to ship at all to the retailer. According to this individual, many vendors were hurt by the non-payment of pre-petition invoices, and now “don’t want to take another loss if they ship in case Sears liquidates. In a liquidation, you don’t know even if you’re going to get the money for the [value of] what you shipped post-bankruptcy.”
A deeper dive into court documents suggests that the company has some significant financial hurdles to overcome.
Sears has been saying all year that it has assets that it can still “monetize” to fund operations. It has spun the $134 million debt payment due Oct. 15 as the immediate reason for its bankruptcy filing. Court records show other pressing financial issues pressuring the company.
A court document filed by chief financial officer Robert A. Riecker, said, “Nearly all of the company’s assets are encumbered, including over 200 real property locations, its most valuable [intellectual property assets] related to Kenmore and DieHard brands, all of its credit card receivables, pharmacy receivables and inventory and most of its cash.”
He also noted that “over $1.7 billion of the company’s debt matures in the balance of fiscal-year 2018 and fiscal-year 2019. On [Oct. 15, the day of the filing], annual cash interest expense is $440 million, and cash-flow loss from burn rate is $125 million a month.”
The cfo also said, “The company has monetized substantially all of its real estate portfolio.” He also noted that in the two weeks before the filing, about 200 vendors either “stopped or refused” to ship goods to the company.
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.”