By Lillian Rizzo and Soma Biswas
Oct. 14, 2018 7:00 a.m. ET
As Sears Holdings Corp. SHLD 18.97% plans to file for chapter 11 protection Sunday, the big question is whether a smaller Sears emerges from bankruptcy or whether the filing leads to a liquidation and a final end to the storied department-store chain.
Sears in recent days reached an 11th-hour deal with lenders that will allow the troubled retailer to keep hundreds of its stores open through the holidays.
The deal followed days of marathon negotiations at the New York offices of Sears’ law firm, the pioneering American retailer and its bank lenders, Bank of America Corp., Wells Fargo & Co., and Citigroup Inc. The banks are set to provide a so-called debtor-in-possession loan of about $500 million, which will be used to keep some of its stores open and lights on for the foreseeable future, according to people familiar with the situation.
Edward Lampert, chief executive officer of Sears, who has controlled the company through his hedge fund ESL Investments, believes the company can reorganize around roughly 300 of the most profitable stores, according to a person familiar with the situation.
As part of the deal, slated to wrap up over the weekend, Sears will close at least 150 stores immediately after seeking bankruptcy protection, another person said. Meanwhile, another 250 stores will be under evaluation.
Currently, the company operates roughly 700 Sears and Kmart stores, according to one of the people.
The plan that Sears and its lenders reached over the past week isn’t unfamiliar. Dozens of retailers have sought chapter 11 protection in recent years, namely because of the consumer shift to online shopping, expensive store leases and heavy debt burdens.
Retailers such as Claire’s Stores Inc., Bon-Ton Stores Inc., Payless ShoeSource Inc., and Gymboree Corp. have all sought chapter 11 protection with early plans to close stores. For some, including Gymboree, Payless and rue21 Inc., having a so-called prepackaged reorganization plan in place allowed the companies to emerge from bankruptcy protection still operating with a smaller footprint.
Others haven’t been as fortunate. Toys “R” Us Inc. and Bon-Ton Stores each sought chapter 11 protection with the hope of surviving. Bon-Ton, which operated more than 250 stores under banners including Carson’s, Bergner’s and Elder-Beerman, looked for an owner or investor that would keep the chain alive, but fell short and was sold to a small group of bondholders and pair of liquidators that closed the entire chain.
Toys “R” Us sought chapter 11 protection last September, and although it didn’t have a reorganization plan or prospect to sell the chain, its management still hoped to survive the filing. Following a disastrous holiday season though, it was ultimately decided to liquidate the more than 800 big-box toy stores in the U.S., and sell or liquidate its international businesses.
Sears’s lawyers and advisers are poised to file a so-called voluntary petition under chapter 11 and other court papers Sunday evening in the U.S. Bankruptcy Court in New York, formally beginning the restructuring process under court supervision. A late-night filing would likely put the company’s lawyers in front of a bankruptcy judge on Monday the earliest.
When a company seeks bankruptcy protection, it must receive a judge’s approval to cut any checks or make most decisions regarding its path forward, including paying its employees, its utilities bills and other standard operations procedures. In addition, the company will likely seek immediate approval to begin using its bankruptcy loan, which will be used to make these payments and keep some stores operating.
The Sears deal came after more than three days of negotiations, which took place at the Manhattan offices of Sears’s law firm, Weil, Gotshal & Manges LLP. Dozens of lawyers, advisers and bankers were present throughout the course of the negotiations that began Wednesday evening and stretched into the weekend, people familiar with the matter have said.
The Wall Street Journal first reported on Tuesday that the 125-year-old chain hired M-III Partners LLC, a boutique advisory firm, to prepare a bankruptcy filing.
Initially, the banks were reluctant to throw Sears a lifeline. Instead, the banks had only been willing to provide a debtor-in-possession loan that would allow Sears enough time to sell inventory and close all of its stores, people familiar with the matter said.
The banks are the principal lenders on a $1.5 billion asset-backed credit line, secured by store inventory as well as credit-card and pharmacy receivables. Much of that credit line has been drawn down, leaving the retailer desperate for cash as the holidays approached and a Monday loan repayment deadline loomed.
While Sears’s lawyers and advisers scrambled to reach an agreement with the banks in the past week, the retailer rebuffed offers of a lifeline from other investors earlier this year, according to people familiar with the matter.
Investors who owned the term loans backed by the same collateral as the banks made approaches as early as last year to discuss a potential debt restructuring or refinancing that would buy Sears more time, people familiar with the matter said. The company consistently said through its legal advisers there was “nothing to discuss,” according to one person involved in the talks.
The term-loan lenders were gradually paid off this year, receiving $95 million in August alone, according to filings with the Securities and Exchange Commission. The repayments puzzled lenders given the company’s looming debt obligations, scarce liquidity and negative cash flow, the person said.
Weil Gotshal, one of the nation’s leading bankruptcy law firms, had been advising Sears’s special committee of directors and started working directly with the company in recent weeks as a bankruptcy filing got closer, according to people familiar with the matter. The company has been working with Lazard Freres and Wachtell Lipton Rosen & Katz, its longtime corporate lawyer, for months, according to people familiar with the matter.
Sears’s assets, including the Kenmore appliance brand and the Sears Auto Centers, could also be a part of bankruptcy-run sales, one of the people said.
One potential bidder could be Mr. Lampert, a person familiar said. The CEO that has controlled Sears for more than a decade has repeatedly bailed out the retailer with short-term loans, but balked this week at providing another lifeline ahead of a Monday deadline for Sears to repay $134 million in loans.
Mr. Lampert, also the largest shareholder and biggest creditor, previously offered to buy Kenmore for $400 million in August, but the deal never received the blessing of a special committee of Sears’s independent directors.
—Andrew Scurria contributed to this article.
Write to Lillian Rizzo at Lillian.Rizzo@wsj.com and Soma Biswas at soma.biswas@wsj.com