Signage is displayed on the landmark Sears, Roebuck & Co. mail order building, where a Sears Holdings Co. retail store operates on the ground floor, in the Boyle Heights neighborhood of Los Angeles, California, U.S. (Photographer: Patrick T. Fallon/Bloomberg)  

Sears Lender Usurped by Cyrus Decries Hedge Fund's Conflicts

(Bloomberg) -- A jilted Sears lender that lost a courthouse bidding war with Cyrus Capital Partners says conflicts of interest, including existing investments in various Sears securities, drove the hedge fund to muscle in as the retailer’s next lender.

Great American Capital Partners, the lender previously set to provide a bankruptcy loan to Sears Holdings Corp., traded terms with Cyrus and Sears in a courthouse hallway and offered revisions to its own proposal before walking away as the deal became untenable, Great American President John Ahn said in an interview.

“If you look at the loan on a stand-alone basis, the final terms they agreed to were unattractive,’’ Ahn said. “Cyrus is invested in a lot of different pieces of Sears’ capital structure in a big way, so it’s unclear what their overall motivations are” in providing the latest financing, he said. Cyrus’s stakes in various tranches of Sears debt complicate its priorities as a new lender, Ahn added.

Officials at Cyrus Capital, Sears and Lampert’s hedge fund, ESL Investments, declined to comment. Lazard, which helped arrange the loan, didn’t immediately respond to a message. Bloomberg reported Wednesday that Cyrus is working with ESL Investments to fund a plan to take Sears out of bankruptcy that could include swapping their debt holdings for Sears stores.

DIP Loans

The bidding concerned debtor-in-possession or DIP loans, which allow a company to keep operating while it’s in bankruptcy. DIP loans are attractive to lenders because they have strong claims on assets, so existing lenders sometimes use them to jump ahead of others in the repayment line. Backing a DIP also gives lenders a key seat at the negotiating table when deals are cut regarding assets and the company’s exit from bankruptcy.

“We agreed to terms of the deal with Lazard and the company over a week ago and have been working on finalizing the credit agreement in good faith,” Ahn said. “Even up to Tuesday, we revised terms as requested by Lazard multiple times. But it was like shooting a moving target.” Sears ultimately agreed to a loan from Cyrus that saves the retailer 1.5 percentage points on the interest rate.

Cyrus has been a long-time investor in Sears, with various positions in the capital structure and interests that might not always align. It also wrote default insurance contracts that effectively bet the department-store chain would survive.

Given the overlapping positions, it’s unclear how Cyrus’s stakes would fare in any given outcome for the company. But the fund’s position as a holder of unsecured debt -- among the last bondholders to get paid -- could motivate Cyrus to help secure the greatest recovery possible for the Sears estate.

Great American’s lawyer Andrew Tenzer said in court that Cyrus’s victory on Tuesday didn’t stem from any breakdown of the lender’s desire to be involved. “Great American remains ready, willing and able to loan on the terms that we negotiated in the documents that were presented to your honor,” he told the judge.

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