Cyrus's Last-Minute Change to Debt Sale May Cost Sears Millions

(Bloomberg) -- Cyrus Capital Partners may have pulled off a key win in the complex financial maneuvering over who profits from derivatives bets on bankrupt Sears Holdings Corp.

The hedge fund extracted last-minute concessions on a debt sale from Sears that could deny the retailer millions of dollars because of how the changes would impact the derivatives market, where traders are trying to settle hundreds of millions of bets on the company’s failure.

The defunct department-store chain obtained court approval on Monday to auction off some $251 million of notes that were issued from one of its subsidiaries to other Sears units. The sale is part of Sears’s plan to raise cash by sparking a bidding war for the paper, which is virtually worthless on its balance sheet, but could play a key role in the settlement of default insurance sold on the chain.

Sears had been expected to fetch between $40 million and $60 million through the auction of the medium-term notes, assuming hedge funds and other market participants would be willing to buy them at around 20 percent of their face value, according to people with knowledge of the matter.

Representatives for Sears and Cyrus declined to comment.

Cyrus Changes

But that was before Cyrus obtained some changes to the Monday court order that authorized the sale. The changes could make the notes less valuable to potential buyers, said the people, who asked not to be named because the matter is private.

The changes include provisions that the sale of the notes won’t be "free and clear" of claims from Sears Roebuck Acceptance Corp., the unit that issued them. The inclusion of that language could increase the odds that a panel of derivative traders will exclude the notes from a separate auction that will determine the payout on some $400 million of swaps on Sears.

“They may be trying to create some uncertainty,” Julia Lu, a derivatives lawyer and partner at Richards Kibbe & Orbe LLP, said on Monday. “Whether or not justified, people may be hesitant in assuming they can deliver these notes into the auction.”

Bids for the auction, which is being run by Jefferies, were due at 12 p.m. New York time on Tuesday. The bids are binding until 4 p.m.

Cyrus, which is believed by market participants to be one of the largest sellers of default insurance on Sears, would benefit if the notes are kept out. The firm had initially challenged Sears’s plan in court, but agreed to withdraw its opposition after lawyers for Sears agreed to the proposed changes.

In a letter sent to the CDS panel on Tuesday, the law firm representing Sears stated the new language is based on standard concepts in bankruptcy cases and does not imply Sears Roebuck had any claims on the notes. But one of the people familiar with the matter said the revised wording had already had a profound impact on market appetite for the paper.

Potential buyers could condition their offers to buy the notes to a final determination that the debt is eligible for the CDS auction. The panel in charge of that determination is scheduled to meet at 3 p.m. to discuss the matter.

Hedge funds who sit on the opposite side of the trade to Cyrus include Brigade Capital Management, Omega Advisors and Och-Ziff Capital Management, Bloomberg previously reported.

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