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Sears Gets Court Approval to Sell Stores

Sears Holdings Corp. won court approval to pursue a sale of its best stores, a process that would be the retailer’s only hope of avoiding liquidation, WSJ Pro Bankruptcy reported. Bankruptcy Judge Robert Drain yesterday signed off on the company’s sale timeline to sell at least 400 of its best-performing stores. The company must find a so-called stalking horse, or lead bidder, by Dec. 15, which would set the floor price for other offers. If there is more than one qualifying bid for the stores, an auction would be held in mid-January. Sears has pegged its future to the sale of these stores since its Oct. 15 bankruptcy filing. Chairman Edward Lampert’s hedge fund, ESL Investments Inc., is expected to make a stalking-horse offer. Through ESL, Lampert is Sears’s largest shareholder and creditor, and his position in the company is being placed under the microscope. Before the bankruptcy filing, he was also chief executive. The company has appointed a special committee to investigate prior transactions between ESL and Sears. In addition, the committee of unsecured creditors has taken aim at ESL, and will be performing its own investigation. Judge Drain approved this secondary investigation yesterday as well.

Sears Swap Seller Looks to Salvage Bad Bankruptcy Bet

The judge presiding over Sears Holdings Corp.’s bankruptcy chided a swap-betting hedge fund yesterday for interfering with the retailer’s effort to auction off loans owed between different Sears affiliates, WSJ Pro Bankruptcy reported. Sears has proposed selling $900 million in internal claims from one company unit against another, taking advantage of surging demand for the debt instruments from credit default swap traders. The sale proposal is being opposed by Cyrus Capital Partners LP, a Sears creditor that wrote insurance on Sears debt, betting the company would survive longer than it did. These internal debts would normally be extinguished in a bankruptcy. But they are suddenly a hot commodity among hedge funds that bought credit default swaps on Sears Roebuck Acceptance Corp. and now need cheap debts linked to that subsidiary to maximize returns. A bidding war for the intercompany notes could raise cash that Sears desperately needs to avoid liquidation.

David’s Bridal Nears Debtor-in-Possession Loan Ahead of Chapter 11 Filing

Troubled wedding gown retailer David’s Bridal Inc is nearing terms for a debtor-in-possession (DIP) financing package with a group of first-lien term loan lenders ahead of the company potentially filing for chapter 11 bankruptcy protection as soon as next week, Reuters reported. The company is the latest retailer to struggle as internet upstarts offer increased transparency on prices, turning its stores into showrooms where customers try on gowns only to buy them online. More than 15 U.S. brick-and-mortar retailers filed for bankruptcy last year. The possible DIP package is expected to be valued between $50 and $60 million, but this may be increased as conversations with lenders are ongoing. First-lien bank debt holders, which include asset manager Oaktree Capital, own the majority of David’s Bridal’s term loan debt, and are expected to provide the DIP financing and take equity in the company. David’s Bridal is owned by private equity firm Clayton Dubilier & Rice. The firm, through a portfolio company called American Greetings Corporation that issued David’s securities, skipped an October 15 interest payment on its 7.75 percent unsecured bond due in 2020. The issuer’s 30-day grace period following the missed interest payment expired yesterday.

Labor Unions File Pension Lawsuit Against Puerto Rico

Puerto Rico violated a law meant to safeguard the pensions of its public-sector workers who have been unable to invest the more than $300 million they contributed to a new retirement plan, according to a lawsuit filed yesterday against the U.S. commonwealth’s government and others by two labor unions, Reuters reported. The litigation, filed in U.S. District Court in San Juan, joins a long list of adversary cases in a form of bankruptcy Puerto Rico’s federally created oversight board initiated in May 2017 to restructure the island’s $120 billion of debt and pension obligations. In the latest lawsuit, the American Federation of Teachers and the American Federation of State, County & Municipal Employees point to Law 106, enacted in August 2017 to require wage deductions from workers participating in a new retirement plan to be placed into segregated employee-controlled, 401(k)-style accounts that they said have not been created. The unions claim that while workers’ contributions totaled $316 million as of July 31, employees have been unable to invest the money, missing out on “historically high stock market returns.” The unions, which represent thousands of teachers and government workers in Puerto Rico, asked the court to find the defendants in violation of Law 106 and of their fiduciary duties and require the creation of accessible retirement accounts by year’s end. The lawsuit also seeks an undetermined amount of compensation for lost investment income.

PG&E Soars After Regulator Signals No Bankruptcy Interest

PG&E Corp. rallied as much as 49 percent in extended trading yesterday after the head of the California Public Utilities Commission said he can’t imagine allowing the state’s largest utility to go into bankruptcy as it faces billions of dollars in potential liability from deadly wildfires, Bloomberg News reported. “It’s not good policy to have utilities unable to finance the services and infrastructure the state of California needs,” PUC President Michael Picker said. “They have to have stability and economic support to get the dollars they need right now.” The end-of-day rally reversed hours of frantic selling, in which the utility fell the most since 2001, during the depths of the California power crisis. PG&E shares had plummeted 64 percent since Nov. 7 amid fears that it would be held liable for a catastrophic wildfire that has killed more than 50 people, destroyed thousands of homes and scorched over 140,000 acres.

Analysis: The Case of the Disappearing Collateral

Demand for riskier bonds and loans has been so intense that companies selling them are able to move valuable assets beyond the reach of creditors, the Wall Street Journal reported. And investors continue to make it easier for them to do so by agreeing to terms in new debt sales that offer them fewer and fewer protections. PetSmart Inc., for instance, earlier this year transferred a minority stake in Chewy.com, its fast-growing e-commerce unit, to a special subsidiary that would likely be protected from its existing bondholders in a bankruptcy, and more shares to a parent holding company even further removed from its creditors. Retailer Neiman Marcus Group Ltd. said in September that it had moved its entire MyTheresa internet unit to a parent holding company, having first transferred the website to its own special subsidiary. Bondholders and other lenders have traditionally enjoyed the right to sell a company’s core assets or take ownership of them if it enters bankruptcy. The recent moves challenge that tradition and highlight the risks for investors in the next economic downturn. “When a lender is deciding to lend money to a [debt] issuer, they generally are thinking they’re getting credit support from all of the assets of the issuer,” said Anthony Canale, global head of research at Covenant Review, a research firm. “They don’t understand that when you read the fine print, the issuer actually has the ability to move assets.”
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