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Sears Will Probably End Up With A Chap 7 Liquidation

|Includes: Sears Holdings Corporation (SHLDQ)
Summary

Equity is $4.4 billion negative.

Even with debt taken out, the company still loses money.

It looks like a ToyRUs type of situation.

The Sears common stock and much of the liabilities are worthless. Those classes will recover nothing in the bankruptcy and will get nothing in the reformed company (Newco), if there even is a reformed company.

I am predicting that the Chapter 11 filing will get converted to a Chapter 7 liquidation at some point, especially once everyone, particular the classes in line to get anything from the bankruptcy, start to realize that Sears can't make any money, even with all of the debt wiped out. The longer the company operates, the less the classes in line for a recovery will get. (i.e. It is like a 'melting ice cube'.)

As background on what happens when a company files a chapter 11 bankruptcy to reorganize and continue operating. If the company is really bad off and can't reorganize, then the chapter 11 gets converted to a chapter 7 liquidation and distributions are made to classes based upon priority of the different classes. If a chapter 11 plan is allowed by the court, then the different debt and equity classes vote on the plan. If confirmed and approved by the court, then the plan is implemented and the company is reorganized.

In a bankruptcy, everything up to the date of the filing gets put into a bankruptcy estate, which is managed by a trustee that is assigned to the case. Assets are collected and totaled, liabilities are collected and totaled, then distributions or a reorganization plan are made based upon priority of the classes.

The order of distributions or the right to vote on a reorganization plan is usually, in general, as follows:First in line are secured loans against the assets they are secured by, usually bonds, secured lines of credit or DIP financing.

Then unsecured priority claims, such as taxes or payroll withholding.

Then unsecured loans which may be unsecured bonds. Then unsecured creditors that are usually vendors . Then preferred shares and last, whatever is left over is for the common shares.

In the typical Chapter 11 reorganization, there is usually no common equity in the new company (NewCo) because liabilities exceed assets by a large amount, so the debt holders get new equity or new debt in the reformed company , and all of the old common equity shares get wiped out. When 'things are really bad', a company is unable to complete a Chapter 11 reorganization and converts the filing to a Chapter 7 liquidation. That is what happened to ToyRUs earlier this year. (Another shocking fall of a long time company, especially when it was completely liquidated.)

Here is the 10Q report for Q2 of FY2019, ending August 04, 2018 for Sears:

Sears Holdings Corporation 10-Q Sep. 13, 2018 4:47 PM

From that report we can see that Sears had negative equity of $4.4 billion and had lost $932 million for the first half of the fiscal year. Total liabilities were $11,339 million and assets were $6,937 million. From these number we can tell: 1: The common shares are dead. The company is 'so far in the hole' that there will be no recovery for them. 2: Recovery for vendors will also be zero, since those are unsecured liabilities and there is no where near enough for any recovery for them. In note 2 on the 10Q report, total borrowings of 4,954 million are reported, so those may recover 100%, providing nothing else is in order of priority to them. There are a number of other liabilities that probably have priority, like the pension and retirement liability of $1,164 billion, which probably takes the remainder of the assets. All of the other classes look like they are on track for zero, and this is if the assets that are listed can be realized for what they are being carried for on the balance sheet. (Note: I would not be surprised that the recovery on the assets is less than what they were being carried for, especially the goodwill of 269 million and Trade names and other intangible assets of 1,090 million.

For me, it is a shocking and sad end to what was once one of the largest companies in the world. Almost everyone remembers the annual holiday 'Wish Book' or catalog that the company would distribute every year, and how at one point it looked like Sears was going to become a one stop shopping place, where anything and everyone you want could be bought, even a mortgage for a house.

I will always remember the opening scene in the book The Big Store, by Donald R. Kat (1987) [https://www.amazon.com/Big-Store-Donald-R-Katz/dp/0670805122/ref=sr_1_1?ie=UTF8&qid=1541463071&sr=8-1&keywords=the+big+store ] about one of the periods of transformation for Sears. The opening scene is a meeting between two company Vice Presidents at a private airport in the middle of the country. Both guys arrive on their own private company jet from opposite ends of the United states for the in person meeting, such was the power and presitige of Sears at that time.

It is a sad and shocking end to what was at one time a great company and something I thought I would never see.

Hopefully, everyone that was or is working there had time to prepare and will be able to move onto something better soon. Whatever happens in the coming weeks, hopefully the company will be able to adhere to the old protocol of not laying off any employees once the holiday season gets under way, which is starting in just a few weeks. For those that do not remember or can not recall, one of the old protocols in corporate America is that 'one did not fire or lay off employees in the holiday season'[Thanksgiving to New Year's Day], since it was considered cruel to do such a thing to ones workers and ruin the holiday season for them.

Take care and Good Luck,

Louis J. Desy Jr.

Monday, November 05, 2018

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.