Cyrus Offers Sears Cash to Settle Dispute Over Note Sale

(Bloomberg) -- Hedge fund Cyrus Capital Partners has had discussions with Sears Holdings Corp. to settle a dispute over the bankrupt retailer’s plan to raise cash by auctioning off a chunk of intercompany debt, according to a person with knowledge of the matter.

Cyrus has discussed the possibility of offering the department-store chain cash if it agrees not to sell up to $900 million of the notes, said the person, who asked not to be identified because the talks are private. The hedge fund manager filed an objection to the planned note sale in bankruptcy court last week.

Sears has been seeking to spark a bidding war among traders in the credit-default swaps market, which is trying to determine the size of a payout on about $400 million of wagers on Sears. Cyrus, which market participants believe is one of the largest sellers of such insurance on Sears, may stand to lose if the notes are auctioned because the sale will flood the market with low-priced debt and effectively boost the amount that must be paid to funds that bought the insurance.

Those swaps buyers, which include Brigade Capital Management, Omega Advisors and Och-Ziff Capital Management, would potentially reap a windfall from the auction. Without the note sale, they face the risk of getting paid only a small amount on their insurance because the swaps are linked to a unit of Sears that no longer has much debt outstanding.

Representatives for Cyrus and Sears declined to comment.

Motives Questioned

The judge presiding over the bankruptcy case has questioned Cyrus’s motives for opposing the plan and demanded the firm clarify the matter at a hearing this afternoon in New York. Cyrus has argued that Sears’s plan to sell the notes, designed to benefit the company and by extension its lenders, would dilute recoveries for creditors.

The dispute stems from the rules that set the amount of compensation for swaps holders when a company defaults on its debts. In Sears’s case, the swaps are tied to a unit that has fewer bonds than there are swaps bets.

If Sears puts more debt into circulation, that would give swaps buyers more notes on which they can collect, boosting the payout. That prospect could force protection sellers to bid up the notes.

©2018 Bloomberg L.P.