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Sears Holding – Files Chapter 11, Announces Board and Management Changes, Agrees to DIP Financing, Plans Store Closures

October 15, 2108 – Sears Holding (“Sears” or the “Company”) and 42 affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 18-23538. The Company is represented by Jacqueline Marcus of Weil Gotshal & Manges. Further board-authorized engagements include M-III Advisory Partners as financial advisor, Lazard Freres as investment banker, and DLA Piper as advisor on real estate matters. The Company’s petition notes more than 100,000 creditors; assets of $6.937 billion; and liabilities of $11.339 billion.
In its Chapter 11 petition and a press release made available early Monday morning, the Company provided the following details. We will update as further documents become available.
$300 million of New Financing included in $1.875 billion DIP Arrangements
In its press release, the Company announced that it has received commitments for $300 million in senior priming debtor-in-possession (“DIP”) financing from its senior secured asset-based revolving lenders and is negotiating a $300 million subordinated DIP financing with ESL Investments, Inc. (“ESL”). As noted in its Chapter 11 filing, the $300 million DIP financing above is part of a larger $1.875 billion DIP ABL loan being arranged with existing senior lenders from whom $1.575 billion has already been borrowed.
Strategic Actions and Store Closings
The Company announced that it intends to reorganize around a smaller store platform of EBITDA-positive stores and that it is its belief that a successful reorganization will save the Company and the jobs of thousands of its employees. The Company is currently in discussions with ESL regarding a stalking-horse bid for the purchase of a large portion of the Company’s store base. ESL had already made public its interest in “credit-bidding” real estate-related debt that it currently holds. In a strategic proposal to the Board, dated September 23, 2018 (the “ESL Proposal”), ESL outlined a plan that whereby it would be willing to purchase those stores that serve as collateral for existing real estate debt for a price that was equivalent to the amount of that debt, ie $1,472 million, of which ESL holds $1,167 million (this amount to be reduced to reflect any proceeds received and paid to holders of that debt further to ongoing store sales). Although the mechanics of the offer were complicated, the valuation and offer in respect of those properties was not: ESL valued those properties at $1,471 million.
The Company further announced that it will close 142 unprofitable stores near the end of the year. Liquidation sales at these stores are expected to begin shortly. This is in addition to the previously announced closure of 46 unprofitable stores that is expected to be completed by November 2018. 
Ongoing Operations and Holiday Season
In motions filed with the bankruptcy Court, the Company has requested authorizations to continue its operations as normal during the restructuring process and Chapter 11 proceeding. The Company intends to continue payment of employee wages and benefits, honor member programs, and pay vendors and suppliers in the ordinary course for all goods and services provided on or after the filing date. The Company’s Sears and Kmart stores; its online and mobile platforms; and its services and brand businesses will also continue to operate as usual. The Company further noted that it intended to work with vendors and other partners to help maintain inventory levels and ensure timely product delivery. 
The Company specifically noted the importance of the holiday season, with Mr. Lampert commenting, “As we look toward the holiday season, Sears and Kmart stores remain open for business and our dedicated associates look forward to serving our members and customers.”
Leadership and Board Changes 
In its press release, the Company announced a series of leadership and Board changes, including 
  • The resignation of Mr. Lampert as Chief Executive Officer, effective immediately’ although, Mr. Lampert will remain the Company’s Chairman of the Board. 
  • Creation of an Office of the CEO, which will be responsible for managing the Company’s day-to-day operations during this process. The Office of the CEO will be composed of Robert A. Riecker, Chief Financial Officer; Leena Munjal, Chief Digital Officer, Customer Experience and Integrated Retail; and Gregory Ladley, President of Apparel and Footwear.   
  • Formation of a Restructuring Committee: The Board has formed a special committee (the “Restructuring Committee”) that consists solely of independent directors and includes Alan J. Carr, Paul G. DePodesta, Ann N. Reese and William L. Transier. 
  • Appointment of Chief Restructuring Officer (“CRO”): Mohsin Y. Meghji, Managing Partner of M-III Partners, has been appointed CRO and will report to the Restructuring Committee. 
  • Appointment of further Independent Director: William L. Transier, Chief Executive Officer of Transier Advisors LLC, has joined Holdings’ Board as an independent director. This appointment follows the recent addition of Alan J. Carr as an Independent Director. 
Comments of Mr. Lampert
In comments made in the Company’s press release, Mr. Lampert concedes a point which many analysts have made over recent years, that the Company simply was not getting the necessary financial support to competitively maintain operations and that operations had suffered in a zero-sum game where balance sheet concerns were being addressed first. Although not addressing his role, or that of ESL, in the implied under-funding, Mr. Lampert commented, “While we have made progress, the plan has yet to deliver the results we have desired, and addressing the Company’s immediate liquidity needs has impacted our efforts to become a profitable and more competitive retailer. The Chapter 11 process will give Holdings the flexibility to strengthen its balance sheet, enabling the Company to accelerate its strategic transformation, continue right sizing its operating model, and return to profitability.”
In comments made in a separate press release issued by ESL, Mr. Lampert commented, “ESL Investments’ longstanding goal has been to enable Sears Holdings Corporation to return to profitability, for the benefit of Sears and all of its stakeholders. ESL consistently believed that restructuring the company’s finances as a going concern and outside a court-run bankruptcy process would have been a better path for Sears. To that end, ESL put forward proposals in April and August to acquire certain Sears assets, followed by a comprehensive proposal in September for liability management transactions, strategic asset sales (including those assets that ESL had made proposals to purchase) and real estate transactions. All the proposals had the goal of providing liquidity and runway for a transformation. While a comprehensive out-of-court resolution was ESL’s preferred approach, it did not prove possible to achieve this outside the framework of a Chapter 11 process. ESL believes that supervision by a judge will enable creditors to address any issue among them according to a clear set of rules and permit the sale of certain assets through a court-approved auction process to maximize value.”
Payment of October 2018 Notes
The Company did not make any specific reference to the payment due today in respect of $89 million of its 6 5/8 senior secured notes. As this is the event which has precipitated the Chapter 11 filing today, we are likely to hear shortly as to the Company’s intentions as to these notes, although given the Chapter 11 filing, and rules against preferential treatment of creditors under bankruptcy law, it is almost certain that amounts due on these notes were not paid.
List of Debt Securities (Including ESL )
The attached summary is prepared based on figures included in the Riecker Affidavit [Docket No. 4], filed with bankruptcy Court on October 15, 2018, and in filings submitted to the SEC. Please consult those documents for further detail as to each of the debt issuances referred to in the attachment.

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