Sears Amended Their Reorganization Plan-What's Changed?

About: Sears Holdings Corp. (SHLDQ)
by: WYCO Researcher

Amended reorganization plan and disclosure statement were filed very early May 16.

Amended documents included changes in the description of the 2nd-lien 2018 note claims.

There was a Consolidated Settlement that would treat all assets as part of the liquidating trust avoiding a potential fight over intercompany claims.

Shareholders and unsecured noteholders are still expected to get no recovery.

Sears Holdings (OTCPK:OTCPK:SHLDQ) filed an amended reorganization plan and disclosure statement (use docket 3896 to see the changes) early May 16. While there are a few minor changes, the biggest changes are how the 2nd-lien 2018 notes are treated and they are consolidating all their assets by canceling intercompany claims and interests. The liquidation analysis also raised the projected total assets for distribution to $334 million from $314 million. Both shareholders and holders of unsecured notes are still expected to get no recovery nor any payment for releases under the amended plan.

Second Lien 2018 Note Claim Changes

There is a major change in the wording for the 2nd-lien 2018 note’s claim:

New Wording

3.7. Second Lien Debt Claims.

Holders of Claims arising under the Second Lien Debt shall receive (1) the same treatment as holders of Other Secured Claims as set forth in Section 4.2 of the Plan to the extent such Claim is Secured and/or (2) treatment set forth in Section 4.4 of the Plan for General Unsecured Claims to the extent such Claim is unsecured, as determined in accordance with section 506((a)) of the Bankruptcy Code.

Original Wording

3.7. Second Lien Debt Claims

Holders of Claims arising under the Second Lien Debt are undersecured pursuant to section 506((a)) of the Bankruptcy Code and are classified entirely as deficiency Claims.

At first reading of Section 4.2, it seems great:

(1) Cash in an amount equal to the Allowed amount of such Other Secured Claim; (2) transfer of the collateral securing such Other Secured Claim or the proceeds thereof in satisfaction of the Allowed amount of such Other Secured Claim; or (3) such other treatment sufficient to render such holder’s Allowed Other Secured Claim Unimpaired.

There are some critical issues here. The problem is that one of requirements under the plan is that the Carve Out Account must fully funded. This the account is being established to pay professional fees. In addition, The Wind Account can’t be used to pay 2nd-lien note claims, including 507((b)) claims. There is some confusion in the filing that seems to indicate 2nd-lien noteholders would get paid before administrative claims, but this is for only administrative claims that were not paid from the Wind Down Account. So there are a number of other claims/expenses that have to be paid first from the limited cash, including cash from asset sales, before 2nd-lien noteholders get any recovery.

Another problems for these noteholders is that they would be sharing any recovery with other secured claims that are still held by Lampert/ESL. Their recovery would come from the liquidating trust and could take some time before they receive any meaningful recovery. To make this even more complex, the recent litigation against Lambert and others is going to attempt to disallow ESL claims under section 502((d)). This could take a long time to resolve, but 2nd-lien noteholders could get an increased recovery if ESL’s claims are not allowed by the court.

Substantive Consolidated Settlement

The “Substantive Consolidation Settlement” is another major change in the amended plan. Under this settlement “all Assets of the Debtors shall be consolidated and treated as Liquidating Trust Assets irrespective of which Debtors own such Assets”. The problem was that some claim holders had a claim only against a specific Sears entity. If that entity had significant assets, the claim holders were asserting in objections that they should get a higher recovery. Now all entities are all consolidated together and assumed to be just one entity. In addition, all intercompany claims and intercompany interests (equity holdings between entities) are going to be cancelled.

This settlement still has to be approved by the court. If it is not approved, there could be huge administrative problems because each Sears entity would need to have a “a separate chapter 11 plan of liquidation”, which could “reduce recovery for other creditors”. It would also drag the case on for a very long time.

Other Changes

There were many other technical changes and wording changes, including the releases by PBGC. Oddly, the exhibit giving recovery projections by each claim class was deleted. The exclusive period to file a plan was extended by the court on May 10 (docket 3800) to June 12 and exclusive period to solicit ballots was extended to August 13. The hearing to approve the adequacy of the disclosure statement was cancelled for May 16 and was reset for May 29, but I am not sure if the new amended filings will result in another hearing date change. As mentioned above, the new projected amount available for distribution was increased to $334 million from $314. These numbers were in the liquidation analysis exhibit.


On the surface it seems 2nd-lien 2018 noteholders may have gained from the amended plan, but if there is only a modest amount available under the liquidating trust to pay them because there are so many other claims/expenses that have to be paid first, their recovery amount may still be disappointing for investors.

The Consolidation Settlement will save a lot of time and legal fees that could have dragged on for literally years. Objections to this change by some claim holders are expected.

I am anticipating additional amendment plans before the court confirms the plan. (Assuming they are not administratively insolvent and can’t get a plan confirmed.) How significant these amendments are is difficult to forecast at this point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.