Is It Time For Sears To Convert To Ch.7 Bankruptcy And Liquidate ASAP

At what point does Sears Holdings (SHLDQ) realize that they just can’t continue in Ch.11 with the expectation of selling Going Forward stores because they are burning cash? Instead of continued borrowing under Jr DIP for an additional $350 million and then in January coming back into court asking for approval of even more DIP financing, would be better just to liquidate ASAP?

Steven Simms from FTI Consulting stated that his firm estimates Sears will need an additional $200 million besides the $350 million Jr. DIP. The declaration in support of the DIP by Sears CFO Robert Riecker (docket 866) clearly indicated how worse their finances have become post Ch.11 filing.

“The Debtors are in need of an immediate infusion of liquidity. The $350 million in incremental liquidity to be provided by the Junior DIP Financing will allow the Debtors to continue operating in the ordinary course with a larger number of stores while they try to secure a buyer for a substantial part of their business as a going concern. Based on my experience as CFO of Sears Holdings and particularly my knowledge of the Company’s projected cash needs, the $250 million interim draw is the minimum amount necessary to get the Debtors through to the proposed final hearing date of December 20, 2018. Absent authority to enter into and access the Junior DIP Financing, the Debtors will be unable to continue operating their businesses”

So if it takes $250 million just to get to December 20, that would leave only $100 million to get to the end of the Ch.11 bankruptcy process.They may be back in court asking for yet another approval for more DIP financing.

If Judge Drain had any backbone he would deny the Jr DIP financing motion. This would most likely force an interested party to file a motion to have this bankruptcy case converted to Ch.7.

Sears May Try to Keep 505 Stores Open

Sears Holdings (SHLDQ) may try to keep more stores opened than expected. According to a court filing (docket 729) on Nov. 14, the number of stores Sears is going to try to sell is about 505.  (Go Forward Stores)  Prior filings by Sears stated that there were only about 400 EBITDA positive stores. It seems, therefore, that they are trying to sell even stores are EBITDA negative.

This information was supplied by Steven Simms of FTI Consulting in a declaration in support of the Official Unsecured Creditor Committee objection to the Global Bidding Procedure. FTI estimated that Sears may need an additional $200 million in cash besides the $350 million Jr. DIP financing that was also filed on Nov. 14. That DIP has an interest rate of L+11.5%.

Because of length of time to complete the process to sell stores under the company’s proposal, the official creditor committee is pushing to have an immediate sale of all the stores to take advantage of the holiday shopping season and to reduce the expenses on professional fees ($5 million per week) and DIP interest expenses.

Pacific Drilling Re-Org Plan Confirmed By Judge

Judge Wiles confirmed the reorganization plan of Pacific Drilling (PACDQ) today in NYC.

The judge would NOT confirm the part of the plan that would have included a large revese stock split. He said that he was told there would be “dilution”, which he said is very different that a reverse stock split when fractional shares are not issued.  Shareholders who do did receive shres because they owned small nymber of shares, would effectively be selling their shares. He further said that shareholders may have filed objections if they knew their shares were effectively being a forced sale.

The lawyers met and told the judge that the shares would be subject to a reverse stock split after the Special Shareholder meeting results under the laws of Luxembourg and NOT because of the reorganization plan. The result for shareholders is the same, but it shows that Judge Wiles is picky-good.

Second point, the objection that QP could participate in the new financing while other shareholders would not be allowed to participate is an issue that should covered at the rights offer/financing hearing. He would have been open to objections then, but since he already approved the financing he would not consider the financing objection at the confirmation hearing.

Still not sure the effective date. Not sure if they will exit Ch.11 on Nov. 7 as planned.

Second Round of Sears Store Closings to be Announced By Nov. 1

Even more Sears Holdings (SHLDQ) are going to be closing during the holiday period. As per the DIP agreement, (docket 7) the second round of store closings will be filed by November 1. The initial round of closings had 142 stores closing and there could be over 150 additional new stores to close in the second round. Additional lease rejections are expected as well.  This Christmas season could have great bargains for consumers in the lower end of the economic strata.

As stated in the DIP agreement (docket 7)

No later than November 1, 2018, the Debtors will file a notice, pursuant to the GOB Procedures, to commence a second round of store rationalizations in accordance with the Store Footprint Plan….The Debtors will file a motion no later than November 20, 2018 and will obtain an order from the Bankruptcy Court no later than December 15, 2018 authorizing the rejection of any leases associated with stores included in the Secondary Store Rationalization.

These additional store closings could have a negative impact on JCPenney (JCP) as shoppers are drawn to the liquidation pricing of goods at Sears during the holiday shopping season. JCP can ill afford to have another poor Christmas shopping season. If vendors are negatively impacted by the bankruptcy at Sears, I expect them to demand pre-payment at JCP before they deliver goods. With weak Christmas sales and pre-payment requirements from vendors, JCP could find itself in a liquidity crisis.

Pacific Drilling SA Bankruptcy- Shareholder Issue

Pacific Drilling (PACDQ) finally filed their reoganization plan (docket 450) and disclosure statement (docket 451) on July 31. The independent board of directors decided to side with the Ad Hoc Group of Debtholders.

The two days of trading for the PACDQ stock following the filling saw the price fall from $0.11 to $0.05 because shareholders are not getting any recovery under the current plan. Some shareholders may have been expecting a token recovery if they “play nice”. This would be something like paying for “releases” that is sometimes included in reorganization plans.

An interesting issue was indirectly mentioned on page 13 of the disclosure statement in a footnote.
On the Effective Date, all Interests in PDSA shall be extinguished and the owners thereof shall receive no distribution on account of such Interests.10
10 Subject to change to comply with applicable Luxembourg law”
SUBJECT TO CHANGE-interesting!.
Pacific Drilling SA is a Luxembourg company and is subject to Luxembourg laws. While they filed for Ch.11 bankruptcy November 12, 2017 in New York, they are still subject to the laws in Luxembourg. This case becomes  more complicated because Luxembourg is not a party to the UNCITRAL Model Law. The recent bankruptcy of Seadrill Limited, for example, was impacted by the Model Law because Seadrill was a Bermuda company and Bermuda is a party to the Model Law.
Under the laws in Luxembourg, just 20% of the shareholders can force PACDQ into a formal liquidation. While it could be very difficult at this point to get shareholders to collectively demand liquidation, it something that the Ad Hoc Group of Debtholders would clearly like to avoid and might be willing to pay a token recovery to current minority PACDQ shareholders a token amount. This token recovery may be cheaper than paying additional legal fees and avoiding further delays in exiting Ch. 11.
The Ad Hoc Group of Debtholders filed an update on July 31 to their debt holdings (docket 447). Their collectively holdings of 2017 notes has increased from $363,668,000; 2020 notes increased from $529,653,000, term loan increased from $417,832,096, and Highbridge joined the group from their filing earlier this year.
I WILL BE UPDATING THIS POST AFTER I RECEIVE CLARIFICATION ON LUXEMBOURG LAWS

Continue reading “Pacific Drilling SA Bankruptcy- Shareholder Issue”

Bankruptcy Updates

EXCO RESOURCES (XCOOQ)

A mediator has been appointed in an attempt to resolve the differences in this bankruptcy case. Mediation is to begin August 6. A hearing is set for August 8 (docket 921) on extending the exclusive period to file a reorganization plan to October 15 and to solicit acceptance until December 14. This is a revised extension request, which was extending exclusive period to December 11 and solicit acceptance to February 11, 2019. If mediation is unsuccessful, I would expect another request to extend the exclusive period.

REX ENERGY (REXXQ) BANKRUPTCY-SOME INSIGHT

As with many Ch.11 cases, equity holders, both common and preferred shareholders, will get no recovery. Holders of the modest amount of unsecured notes will most likely also get nothing. Rex is selling all their assets and it seems that the 2lien holders will make a credit bid (plus additional cash) for the assets. DIP and 1lien holders are expected to get cash for a full recovery. Rex is expected to exit Ch.11 in early November.

Retail holders of the unsecured notes are very unhappy because not only are they not getting anything but they could not participate in the March 2016 exchange offer that would have given them 2lien secured notes for their lower priority unsecured notes. The exchange offer was only open to “qualified institutional” holders and non-residents. As has been common for years, preferred shareholders are getting nothing. Their priority over common shareholders has almost become irrelevant.

Milestones Timeline

Filed for Ch.11 on May 18, 2018

*50 days     Order approving the procedure to sell assets

*75 days     Order approving the disclosure statement

*115 days   Bids deadline

*125 days   Auction (if needed)

*170 days   Closing of asset sales and distribution or effective date for re-org plan

Restructuring Support Agreement

The best location to read the RSA and other important information is in CEO Thomas Stabley’s declaration in docket 36. There are 2 paths that being followed simultaneously. The first path is the sale of assets with proceeds paying the classes in their priority order. The second path gives DIP and 1lien holders the equity in a newly reorganized company if an asset sale fails.

The asset sale is subject to a reserve price (1lien credit bid amount plus outstanding fees plus a maximum of $5 million to wind down Rex). I do not expect any outsider bidders. The mostly likely and only bid will come from 2lien holders. There are about $588 million in 2lien notes.

In theory 1lien holders could make a credit bid (Note: a credit bid is where the amount of the holders secured claim is considered the same as cash-even if the market values the claim at less than that amount.). There are two reasons that I do not expect 1liens will make a credit bid. First, according to the RSA, 1liens “agree to support and not object or interfere with such a bid (a 2lien credit bid). Second, the 1liens “agree not to submit a bid in excess of the credit bid plus funding for wind down” (maximum $5 million).

I am expecting that the 2liens will make a credit bid plus additional cash. At this point I am not sure about the status of 2lien holders that may not want to participate in the purchase  and if there could be some potential litigation. Since 2liens can use a credit bid, it is very unlikely that a third party will be willing to bid and win. They would have to pay a price higher, in my opinion, than the assets are worth.  Any sale will be structured to be able to maximize the use of the $257 million NOLs (net operating loss) for future income benefits.

Other Issues

The DIP financing of $411.3 million is being used to pay off the $261.3 million term loan plus $50 million “make whole” and $35.2 million for “Oil Patch Vendor” claims (docket 270). (These claims are not being classified as general unsecured claims, which would have about the same low priority as the unsecured notes) That leaves under $65 million for other expenses and normal operations

The wells in Carroll County, OH and Butler County, PA “remain unencumbered”. The proceeds from their sale under an expected bid from 2lien holders will not, however,  be available to unsecured noteholders nor equity holders. That cash would be used to pay 1liens/DIP holders.

The Ch.11 case has the highly litigated issue of “Make Whole”. Instead of litigating, the various parties have agreed to a $50 million MW payment. (Note: “make whole” is where a loan agreement states that all future non-payments of interest payments are added-up and are due when the company files for bankruptcy.)

Conclusion

Since equity and unsecured notes are not getting any recovery there is no reason to keep those securities. Holders of 2lien notes may have the potential to make a respectable profit depending upon their cost for their notes.

Disclosure

I do not currently have a position in any security mentioned in this report. The report is meant for information only. The securities mentioned in the report are very speculative and may be inappropriate for many investors.