Sears Holdings – Unsecured Creditors Object to Going Concern Sale, Argue that “Wishful Thinking” Should not be Allowed to Justify $125 million Monthly Burn Rate

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November 9, 208 – The Debtors’ Official Committee of Unsecured Creditors filed an objection [Docket No. 640] to the Debtors’ proposed global bidding procedures [Docket No. 429]. The Committee asserts, “If approved, the Global Bidding Procedures will lock the Debtors into a three-to-four month process for a going concern sale of the Go Forward Stores (the ‘Going Concern Sale Process’). The pursuit of this option (i.e., seeing whether a bidder materializes for the Go Forward Stores) is estimated to cost the Debtors’ estates approximately between $375 million and $500 million (based on a cash burn rate of $125 million a month), plus additional DIP financing in an amount at least commensurate with the projected cash burn. In order to obtain this additional DIP financing, the Debtors will be required to provide as collateral previously unencumbered assets (worth at least hundreds of millions of dollars). Accordingly, unsecured creditors will bear the entire cost of pursuing a Going Concern Sale Process….The fundamental question with which the Creditors’ Committee must grapple is whether the Going Concern Sale Process will maximize value, as compared to a near term GOB process. To date, the Creditors’ Committee has been unable to answer that question in the affirmative and, thus, cannot support the Debtors’ decision to pursue the Going Concern Sale Process as currently structured. Indeed, the Creditors’ Committee remains unconvinced that the Going Concern Sale Process is a prudent use of the Debtors’ dwindling resources and in the best interests of their estates and creditors. 

First, the Go Forward Store ‘business plan’ appears to be nothing more than wishful thinking, as it will require a reduction in the Debtors’ excessive selling, general and administrative expenses by almost two-thirds to return to profitability, a feat the Debtors could not accomplish in the six years leading up to the commencement of their chapter 11 cases…How did the Debtors themselves make the determination that pursuing the Going Concern Sale Process is a sound exercise of business judgment, particularly in light of the Debtors’ current cash burn rate of $125 million per month? Surprisingly, upon information and belief, the Debtors have yet to prepare an analysis comparing their Go Forward Stores plan to a liquidation. Unfortunately, and notwithstanding desires to the contrary, continuing to operate as a going concern may no longer be an option for these Debtors.  Second, the decision to pursue this path will cost hundreds of millions of dollars and the Debtors, who have the burden of justifying this course of action, have been unable to provide the comfort or guidance to their creditors that the net realizable proceeds will exceed the cost of pursuing the Going Concern Sale Process. Finally, any decision to pursue this option should be informed by what unsecured creditors, whose money is at stake, believe is appropriate…Confirming the Creditors’ Committee’s concern, only one bidder has emerged publicly for the Go Forward Stores:  Edward Lampert’s ESL Investments, Inc. (together with its principals and affiliates, ‘ESL’). Now that the Debtors have sought bankruptcy protection, however, they no longer can construct transactions for the benefit of ESL…. If, a month from now, ESL is the only bidder for the Go Forward Stores, the Debtors will find themselves in an impossible situation. They will have saddled their estates with significant additional debt in connection with a junior DIP facility and consumed over $300 million in additional operational losses to find a lone, pre-existing insider bidder, intent on credit bidding claims that may be subject to avoidance or subordination.”  

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