Sears Judge Skewers Cyrus on Motive for Opposing Survival Plan

(Bloomberg) -- Hedge fund Cyrus Capital Partners has tried everything it can to stop Sears Holdings Corp. from selling some obscure internal notes to raise cash. Now the judge overseeing the bankruptcy is losing his patience and openly questioning why Cyrus, a major creditor, is standing in the way of a deal that could help salvage the retailer.

“I want to know!” Judge Robert Drain said at the Thursday hearing as he rebuked Cyrus’s attorney. “I’m going to take it quite seriously, that point, the inquiry into your client’s motives on this.”

The dispute pits the hedge fund against Sears as it tries to line up more cash to get through the holiday season and craft a long-term survival plan. The note sale could buy some breathing room for Sears, which faces restive suppliers, landlords and other low-ranking creditors who say they’d be better off if Sears was dead.

Drain implied that Cyrus may be more concerned with its dealings in the credit-default swaps market, where the firm is believed by market participants to be one of the largest sellers of default insurance on Sears. While Cyrus hasn’t publicly disclosed its position, sellers of protection could be on the hook for millions of dollars if the Sears note sale gets approved.

‘Come Here’

The hedge fund argued that Sears’s plan to sell up to $900 million of the notes, designed to benefit the company and by extension its lenders, would instead dilute recoveries for creditors.

“Your client will have to come here and tell me why it thinks it’s going to be diluted,” Drain told a lawyer for Cyrus at Thursday’s hearing. “I don’t want you to just lob something in and tell me sotto voce ‘and we’re participants in the CDS market,’ which I think may be the reason they’re objecting.”

The dispute stems from the arcane 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. That means protection sellers could avoid having to make significant payouts to other funds that bought the insurance. But if Sears puts more debt into circulation, that would give swaps buyers more notes on which they can collect, boosting the payout.