Sears prepares to file for bankruptcy in coming days

NEW YORK — Sears Holdings Corp. is preparing to file for Chapter 11 bankruptcy protection in the coming days following years of declining sales, sources said on Wednesday, casting doubt over the survival of what was once the world’s largest retailer.

The bankruptcy filing would end a standoff between Chief Executive Officer (CEO) Eddie Lampert, the retailer’s biggest shareholder and lender, and a special board committee the company has formed to consider a rescue plan proposed by Mr. Lampert that would involve asset sales and a debt restructuring.

The committee has been resisting the plan amid concerns that creditors and shareholders would sue over it being too favorable for Lampert. His history of financial engineering at Sears for more than a decade through deals tied to his hedge fund ESL Investments Inc could now be subjected to new scrutiny by Sears’ creditors in bankruptcy court, according to the sources.

Both Mr. Lampert and the Sears special committee now accept that only a court-supervised process can determine the company’s future, one of the sources said. Talks are under way to arrange debtor-in-possession financing for a bankruptcy filing that could come in the next few days, the sources added. CNBC first reported on the debtor-inpossession financing talks, while the

Wall Street Journal first reported on Sears’ bankruptcy preparations.

A $134-million debt payment that Sears has to meet on Monday has added pressure on both Mr. Lampert and the special committee to find a resolution. Mr. Lampert had told the special committee he would not help the company fund that obligation unless it agreed to his plan, the sources said.

The sources asked not to be identified because the matter is confidential. Spokespeople for Mr. Lampert and Sears declined to comment.

“For whatever reason, Sears’ board said enough is enough,” said Chad Brand, president of Peridot Capital Management, which holds Sears bonds. Mr. Brand added that he had significantly cut down on his Sears bond holdings earlier this year amid concerns from his clients.

At its peak in the 1960s, Sears sold everything from toys and auto parts to mail-order homes, and was a key tenant in almost every big mall across the US. But it has struggled to reinvent itself in the face of online competition from companies such as Amazon.com, Inc. as well as from other brick-and-mortar retailers, including Walmart, Inc. It is not clear whether Sears would survive a bankruptcy process. When Toys “R” Us, the largest specialty toy retailer, filed for bankruptcy protection last September, it sought to emerge from it after restructuring its debt and shutting stores. Instead, it was forced to liquidate last March, after creditors balked at providing a new lifeline to the company.

If Sears were to file for bankruptcy, its financial performance during the upcoming holiday season could prove crucial in determining its future, according to the sources. Toys “R” Us’ creditors lost faith in the retailer after revenue during last year’s holiday season failed to meet their expectations.

Retaining the confidence of vendors is also key to Sears remaining operational. Victor Sandy, who helps suppliers hedge the risk of nonpayment for goods at Michigan-based Global Commercial Credit LLC, said vendors will be looking to see if Sears can secure enough financing to see it through bankruptcy.

“The risk is a formal reorganization turns into a liquidation if things do not go well. That is a real risk that we saw happen with Toys “R” Us,” said Sandy.

Sears shares were down 31% at 40.5 cents in afternoon trading in New York, giving the company a market capitalization of just $40 million. The stock, which traded above $100 a decade ago, has fallen to less than $1 in the past year. Sears’ borrowings totaled $5 billion as of Aug. 4.

The Hoffman Estates, Illinois-based retailer has posted seven straight years of losses and its sales have not grown since the 2008 financial crisis. The retailer warned last month it may go out of business if the deals proposed by Mr. Lampert were not approved.

Mr. Lampert, who created Sears in its current form in 2005 by acquiring it in a $11-billion deal and merging it with his discount retailer Kmart, proposed deals to reduce the company’s debt load to $1.2 billion from $5.6 billion in September. The Sears special committee had also been weighing a prior offer from Mr. Lampert to acquire the retailer’s Kenmore appliances brand and its home services business for as much as $480 million. —