Signage is displayed on the window of a Sears Holdings Corp. store on Black Friday at the Newport Centre Mall in Jersey City, New Jersey, U.S. (Photographer: Victor J. Blue/Bloomberg)

Cyrus Becomes Sears Bankruptcy Lender After Cutting a Deal in Courthouse Hallway

(Bloomberg) -- Cyrus Capital Partners will provide Sears Holdings Corp. with a loan that will keep the bankrupt retailer’s stores open after the hedge fund won a bidding war in a courthouse hallway, according to a lawyer for Sears.

Sears had previously struck a deal for a $350 million loan from specialty financing firm Great American Capital Partners that would have cost 11.5 percentage points over a benchmark lending rate, according to a previous court filing. But after some last-minute wrangling outside a courtroom in White Plains, New York, the company emerged with a new loan from Cyrus that will cut the company’s borrowing costs by 1.5 percentage points, company lawyer Sunny Singh said at a hearing Tuesday.

Judge Robert Drain said he’ll approve the so-called junior debtor-in-possession, or DIP, financing, which ranks below earlier funding that the retailer lined up for its Chapter 11 proceedings.

“We had bidding for the junior DIP literally outside in the hallway for the last hour,” Singh told the judge. He added that the agreement with Great American had required the lender’s approval of any liquidator hired in the case, while the deal with Cyrus did not. (A different unit owned by Great American’s parent company often serves as a liquidator of troubled retailers.)

The new debt further ties Cyrus, already a major Sears creditor, to the fate of the Hoffman Estates, Illinois-based retailer. Cyrus also won an auction for $251 million of internal Sears debt that gives the retailer a jolt of cash while also helping the hedge fund protect the value of derivatives wagers it made on Sears, a person with knowledge of that matter said earlier on Tuesday.

Swaps Bets

Cyrus is believed by market participants to be one of the largest sellers of such derivatives, known as credit-default swaps, which insured against a Sears default. By purchasing the intercompany notes for $82.5 million, it can now prevent them from being used by other derivatives traders to boost the payout required on the trades.

Sears has been liquidating unprofitable stores through the holiday shopping season as it seeks to emerge with a smaller chain of its namesake and Kmart outlets. The company is seeking bids by Dec. 5 for 505 stores, although it’s also accepting bids to liquidate them. Sears Chairman Eddie Lampert, the company’s biggest shareholder and largest creditor, is expected to make a bid to keep a group of stores open.

A lawyer representing Great American expressed frustration that Sears negotiated with the company for two weeks before switching to Cyrus.

“For whatever reason, the debtors chose to go with the Cyrus loan,” the lawyer, Andrew Tenzer, said in court. “It is not because Cyrus offered better terms.”

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

©2018 Bloomberg L.P.