Sears Suppliers Sell Trade Claims Amid Cash Shortage Concern

(Bloomberg) -- Sears Holdings Corp., the bankrupt retailer, owes money to vendors for everything from lawn mowers to washing machines. Those companies are increasingly worried the department store company will bleed too much cash to repay them in full.

The vendors are selling their legal claims against Sears to hedge funds like Whitebox Advisors and Cherokee Debt Acquisition, with over $24 million of unpaid bills having changed hands so far, according to a Bloomberg News analysis of court filings. Whitebox has snapped up the vast majority of the debt. Cherokee has offered vendors between 55 and 70 cents on the dollar for the paper, according to people with knowledge of the transactions.

Investment bank Jefferies Financial Group Inc. has also been seeking to buy the claims for 55 cents and sell them for 65 cents as recently as this week, according to people with knowledge of the market prices. Sears vendors including Electrolux AB, Sub-Zero and Perfect Fit Industries are among those that have chosen to get cash now, according to the court filings. The claims are among the first to be paid in a bankruptcy process.

‘Hemorrhaging Cash’

“The business is hemorrhaging cash so there’s quite a lot of risk, and that’s reflected in the prices,” said Vladimir Jelisavcic, chief investment officer at Bowery Investment Management, of which Cherokee is an affiliate. Cherokee bought about $382,000 worth of so-called 503(b)(9) claims and later sold about $191,000 of those claims to Whitebox, according to court filings.

A representative for Whitebox declined to comment, while representatives for Jefferies and Hoffman Estates, Illinois-based Sears didn’t respond to requests for comment. The people familiar asked not to be identified because the trading is private.

The price at which the claims are being offered could reflect a number of scenarios “from outright liquidation, indicating an administratively insolvent company, to going-concern sales that the court may allow to treat the claims less favorably than expected,” said Negisa Balluku, a Bloomberg Intelligence analyst focused on bankruptcy litigation.

At between 55 and 70 cents on the dollar, the Sears claims would be trading well below the prices fetched at similar stages in the bankruptcy of Toys “R” Us Inc. which ended in liquidation, according to the people. In the case of retailer Bon-Ton Stores, which also liquidated after filing for Chapter 11, similar claims were paid at around half their face value.

Priority Claims

Because they relate to goods and services that were provided to Sears shortly before its Oct. 15 bankruptcy filing, these vendor IOUs are considered part of the so-called administrative claims.

Like other administrative priority claims, they must be paid in full in order for the company to successfully emerge from bankruptcy unless the vendors agree to take less than what they are owed. Even if Sears remains under court protection, they are among the first to be paid. Suppliers can sell them at a discount if they fear the company will run out of money before then.

"If you’re a vendor, you may need cash at this time of the year" so 55 cents on the dollar now might be better than 100 cents three or five months from now, said David Wander, an attorney at Davidoff Hutcher & Citron LLP who represents two vendors in the Sears bankruptcy. Wander is telling his clients to hold on to their claims unless they need immediate access to cash.

Sears has already funded more than half of a $240 million wind down account that can be used to pay the administrative claims. It raised the funds through a $82.5 million sale of controversial inter-company debt to hedge fund Cyrus Capital Partners and an additional $60 million through the disposal of its home improvement division.

Professional fees for lawyers and advisers steering the company through bankruptcy are also included in the administrative claims, but benefit from a provision that gives them even greater priority in the repayment waterfall, according to a source familiar with the matter.

Sears is also shopping around its stores, looking to gauge what they’re worth in the open market while it weighs a bid from Chairman Eddie Lampert to buy the entire chain and keep it open. The firm has hired real estate firm Jones Lang LaSalle Inc. to market its portfolio of about 500 U.S. stores and so far has seen high interest in major markets, Bloomberg reported earlier this week.

The case is 18-23538, Sears Holdings Corp., U.S. Bankruptcy Court, District of New York (White Plains)

--With assistance from Eliza Ronalds-Hannon.

To contact the reporters on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net;Katherine Doherty in New York at kdoherty23@bloomberg.net;Josh Saul in New York at jsaul15@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;Rick Green at rgreen18@bloomberg.net, Dan Wilchins

©2018 Bloomberg L.P.