January 28, 2019 – The Debtors Unsecured Creditors Committee (the “Committee”) filed a 360 page objection to the Debtors’ proposed $5.5bn sale of going concern assets to Edward Lampert’s ESL Investments (“ESL”) [Docket No. 2042]. The scathing attack does not stop with Lampert and ESL, but describes the Debtors as failing to run a meaningful and fair process for maximizing creditor returns, concluding that the “Debtors have not met their burden of demonstrating that the ESL Sale is in the best interest of the Debtors’ estates and creditors…Not only is the ESL Sale premised on an impermissible credit bid of over $1.3 billion and an unrealistic and unreasonable business plan for Sears NewCo, the terms of the sale are nothing more than an illusory one-way option for ESL to acquire the Debtors’ assets while leaving the Debtors’ estates administratively insolvent and without satisfying outstanding obligations or, at best, poised for a chapter 22 filing in the near term.”
The objection begins, “The primary stated objectives in pursuing a going concern transaction were laudable: (i) ensuring the Debtors’ administrative solvency and (ii) saving up to 45,000 jobs. But the true intended beneficiaries of such process were the Debtors’ former CEO and Chairman of the Board, Edward S. Lampert (‘Lampert’) and his hedge fund, ESL Investments, Inc. Indeed, since early in these cases, the Debtors have acknowledged that ESL likely was the only “going concern” bidder and would seek to credit bid nominally secured claims—claims that the Debtors acknowledged were subject to significant dispute—as part of its bid.”
“The majority of the Debtors’ other assets currently are encumbered by a significant amount of secured debt obligations. Certain of these secured debt obligations arose from “regular way” financings from reputable third party lenders, such as the lenders under the Debtors’ first lien asset backed lending facility, which is secured by liens on accounts receivable (and related cash proceeds) and inventory. The vast majority of the Debtors’ other “secured debt obligations,” however, arose from insider financing transactions with ESL. The ESL-centric financing facilities were put in place while Sears was lying on its deathbed following a series of spin-off transactions, like Seritage and Lands’ End, that lined Lampert’s and ESL’s pockets while stripping Sears of its most valuable business lines and real estate assets.”
The objection continues, “First, although the Debtors and ESL tout the ESL Sale as a ‘going concern’ transaction that ‘would preserve 45,000 jobs,’ this Court, unfortunately cannot take any comfort in such an assertion. The business plan upon which the ESL Sale is premised (the ‘ESL Business Plan’) assumes—without adequate (if any) support—that the same insiders that drove Sears into bankruptcy can ‘transform’ the enterprise through unprecedented and unsubstantiated growth rates and with razor thin liquidity.
“Second, the ESL…Sale Indeed, Buyer’s obligation under the APA to pay approximately $667 million in assumed administrative liabilities is nothing more than a contingent reimbursement obligation, the sole remedy for which is a general unsecured claim in favor of the Debtors against Buyer, a newly created ESL shell entity whose only value is tethered to a sinking ship without a viable go-forward strategy…. The ESL Sale also contemplates numerous other administrative expenses that will deepen the Debtors’ administrative insolvency and cause the Debtors to bear significant credit risk in respect of Sears NewCo. These expenses result from, among other things: (i) royalty payment obligations in connection with intellectual property owned by non-Debtor KCD IP, LLC;8 (ii) ongoing administrative expenses incurred by the Debtors following closing of the APA (and as required under the APA) on account of assets sold to Buyer; (iii) professional fees including in connection with the prosecution of the ESL Sale and the extended post-Closing period during which the Debtors are required to provide services to Buyer under the APA; and (iv) numerous potential reductions of assumed liabilities.
Third, ESL accomplishes its feat of exchanging $35 million in cash for (i) allowance of all the ESL Claims and (ii) a broad release of valuable estate causes of action to enable it to submit an inappropriate and impermissible credit bid. The credit bid, however, is premised on disputed claims in contravention of applicable law and, moreover, cannot credibly be offered as consideration for the purchase of the Debtors’ unencumbered assets… Yet, ESL has refused to allocate its purchase price, as expressly required under the Global Bidding Procedures. Therefore, it is impossible to know what value (if any) ESL is ascribing to the acquisition of the Debtors’ unencumbered assets.
Fourth, all evidence, indicates that the value-maximizing path for these Chapter 11 Cases is an orderly sum of the parts sale process and a contemporaneous GOB process run by the Debtors. A properly conducted wind-down process will yield higher and better results than the ESL Sale, which will, in turn, enable the Debtors to distribute to their unsecured and true third-party creditors the value to which such creditors are entitled. And such process would not include the inappropriate release in favor of ESL or permission for ESL to credit bid disputed claims.”
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