Sears burns cash while betting on loans for survival

Eliza Ronalds-Hannon and Allison McNeely
Bloomberg News

Fast-dwindling cash is casting doubt on whether Sears Holdings Corp. can firm up its survival plan in time to avoid liquidation.

Sears is expected to bleed $220 million in just the first month of its bankruptcy, court filings show, cutting deep into the $300 million loan it secured this week from senior lenders. The crunch could become more acute if Sears doesn’t get an additional $300 million it’s counting on from Chairman Eddie Lampert to keep operating beyond the next 15 days.

The retailer is staking its turnaround on getting a $112 million loan from Lampert’s ESL Investments hedge fund by Nov. 3, according to a budget approved by the court, and another $188 million over the following two months. The new funds, Sears said in court papers, “will not be required for the Debtors to operate during the first two weeks of these cases, but will become necessary thereafter.”

Key terms still need to be worked out with other stakeholders. Friction could develop over issues such as what assets Lampert would get as collateral, whether he gets to be the lead bidder to buy some Sears stores, and what concessions creditors will make–if any–to settle their claims against him. Representatives for Sears and ESL Investments declined to comment on the cash burn or the negotiations.

Cash needs

Sears’s historical cash needs suggest the existing $300 million in financing won’t last long, said Steve Goldberg, president of the New York-based retail consultancy The Grayson Co. “It’s not a lot, considering their obligations with paying vendors, not to mention staffing and other operational costs,” Goldberg said.

By comparison, Toys R Us borrowed around $1 billion when it filed bankruptcy, and it still burned through that cash too fast to survive. The experience left creditors and vendors wary.

“There is no such thing anymore as too big to fail. We learned that with Toys,” said Kenneth Rosen, chairman of the bankruptcy and creditors’ rights practice at Lowenstein Sandler in New York. His firm represented some vendors that were creditors to Toys R Us.

While Sears could have used a larger loan, it’s a tough sell to lenders who are skeptical of the chain’s staying power, given the company’s long decline.

Alternate outlets

“The big issue today compared to a couple of years ago is that the consumer doesn’t need them,” said Goldberg, who has worked for Allied Stores and American Express. “There’s nothing that the consumer can get at a Sears or Kmart that they can’t get at Walmart or Target or some other retailer.”

For his part, Lampert says he believes Sears has a future “as a smaller, less indebted retailer,” according to a statement on the day the bankruptcy was filed by the Hoffman Estates, Illinois-based company. “We intend to work closely and collaboratively with other stakeholders to restructure the company’s balance sheet using the Chapter 11 framework as quickly and efficiently as possible,” Lampert wrote.

The Toys R Us comparison is top of mind for stakeholders concerned they’ll end up on the wrong side of a sudden liquidation. That includes vendors and landlords, who may run out of patience as Sears works on its rescue plan. That would make any turnaround tougher, according to Goldberg. “It becomes a bit of a self-fulfilling prophecy; if they can’t get fresh inventories, it just exacerbates it even further,” he said.

The prospect could make some stakeholders reluctant to go along with the recovery plan even if Lampert does come through with more money, Rosen said. “If they’re losing $220 million a month, the question is, how long can they continue before the bondholders and the bank say, Shut this thing down’?”