Cyrus Capital Partners and a hedge fund run by Sears Holdings Corp. Chairman Eddie Lampert are preparing a potential joint takeover bid that would keep the bankrupt chain alive, according to people with knowledge of the matter.
The prospective suitors may offer to swap debt that they hold for ownership of the stores in a so-called credit bid, said the people, who asked not to be identified because the process isn’t public.
Representatives for Lampert’s ESL Investments Inc. hedge fund and Cyrus declined to comment. A representative for (SHLD), based in Hoffman Estates, Illinois, also declined to comment. A takeover would require approval from the bankruptcy court, and competing bids from other suitors are still possible, including one that would liquidate the company.
The potential bid gives the 125-year-old retailer a path out of bankruptcy court, where it landed last month after succumbing to dwindling shoppers and billions of dollars of debt. Since its Oct. 15 Chapter 11 filing, the company has been scraping together loans to keep its stores open through the holiday shopping season. It has started a bidding process for 505 of its remaining Sears and Kmart outlets with offers due next week.
Lampert, who for years kept Sears afloat with lifelines and financial engineering, has said he was considering making an offer to keep Sears open for business. The retailer’s unsecured creditors previously called that plan “an unjustified and foolhardy gamble with other people’s money.”
Cyrus and Sears earlier this month found themselves at odds over the company’s plan to raise cash by selling notes to debt traders — a move that would devalue a side bet Cyrus had made on the bankrupt retailer’s survival. Cyrus ultimately wound up buying those notes itself, and in a last-minute courthouse hallway deal on Tuesday, it stepped in to provide key bankruptcy financing the retailer needs to keep operating.
In doing so, it displaced Great American Capital Partners, the previously-announced lender for the so-called junior debtor-in-possession financing, adding the latest twist to an already unusual situation.
Normally, a company entering bankruptcy will secure one loan to fund operations as it reorganizes or winds down. But the lenders that would traditionally extend that financing were only willing to provide about half of the needed amount. Lampert was expected to help provide that second piece of the funding, possibly with Cyrus, but had difficulty finding partners initially, Bloomberg previously reported.
Cyrus stepped in to provide the funding after also winning the auction for $251 million of the internal Sears debt that gives the retailer a jolt of cash. Buying those notes helps the hedge fund protect the value of credit derivatives swaps it sold on Sears. Cyrus, believed by market participants to have written much of the default insurance, can now prevent them from being used by other derivatives traders to boost the payout required on those trades.