ESL to Credit Bid for Sears; Likely Becomes Stalking-Horse Bidder

Liquidators are likely to bid as well.

Even though ESL Investments will likely become the stalking-horse bidder on the sale of Sears Holdings Corp., there's no guarantee that Sears Holdings Corp. ultimately still won't be liquidated.

ESL Investments has said it plans to credit bid for the assets. The hedge fund is controlled by Edward S. Lampert, who is also chairman of Sears. ESL holds $2.6 billion in secured debt owed to it by Sears, and a credit bid would allow the hedge fund to use the dollar value of its credit claims as part of the bid for the retailer. That benefits ESL because it means it will need to bring less financing to the table.

ESL said in a court document filed earlier this week that it is “working around the clock with potential lenders seeking to finance a bid, with potential partners to structure a bid, conducting necessary diligence and building the business plan that will support a going concern bid.”

Credit bidding is allowed under the U.S. bankruptcy code. Creditors often try to block it because they want as much cash brought to the table as they can get to help pay creditor claims. A creditor able to use credit claims can place an offer that's higher than those from competing bidders, but that also translates to a lower cash component. In the case of Sears, liquidators are expected to circle around and place competing bids. But the expectation is that a credit bid from ESL will put the hedge fund in the driver's seat to become the stalking-horse bidder.

Presuming ESL does become the stalking horse, there's no guarantee that the hedge fund will prevail and own Sears. After a stalking-horse agreement is in place, it would still need bankruptcy court approval, as well as a court nod on bidding procedures. Next up would be an auction to determine the final winner of Sears' assets. Essentially, the role of the stalking-horse bidder is to help set a baseline price for the assets. And in any auction, the door is wide open for others to join the bidding party.

In July 2016, bankrupt teen chain Aéropostale Inc. filed a lawsuit against private equity firm Sycamore Partners as a maneuver to prevent credit bidding by the company to purchase the retailer's assets. The two had an acrimonious relationship, and Aéropostale was afraid that Sycamore's claims would be exchanged for an equity stake in the post-bankruptcy entity. Sycamore did become the stalkinghorse bidder, but was ultimately outbid at a court-approved auction by a consortium led by Authentic Brands Group that included Simon Property Group and General Growth Properties.

British retailer Sports Direct became the stalking-horse bidder for bankrupt sporting goods firm Eastern Outfitters in April 2017, applying a $29 million credit bid. That bid was for more than $30 million, composed of $500,000 in cash, the credit bid and full payoff of Eastern's first lien financing obligations.

Presuming ESL can line up financing for a credit bid, the big question then will be whether liquidators, or even other bidders, would step up to the plate and try to place higher offers at auction.

Separately, the bankruptcy court in

White Plains, N.Y., on Friday signed an order approving bidding procedures for the sale of the Sears Home Improvement Business. Sears earlier this month inked a $60 million stalking-horse deal with Service. com for the asset.

Sears filed its voluntary Chapter 11 petition for bankruptcy court protection on Oct. 15.