About two weeks ago, Sears CEO Eddie Lampert took off his retail-executive hat and put on his major-lender-to-the-retailer-he-both-manages-and-majority-owns hat. Acting as the head of his hedge fund, ESL Investments, he brought to Sears' board an aggressive proposal to divest assets (many of which his ESL would acquire) and shed debt.

In a presentation, he warned the board needed to act quickly on the plan, given Sears' "significant liquidity constraints," not least among them a $134 million debt payment due Oct. 15. The offer was so characteristic of the financially entangled relationship between Lampert and Sears, as well as the retailer's chronic financial woes, that one could easily underestimate its significance. One could be forgiven if the proposal faded into the white noise of Sears' many and complicated financial maneuvers over the years to free up cash and reduce debt.

It turns out "significant liquidity constraints" was an undersell. According to multiple media reports, the company has recently hired restructuring advisors and is talking with bankers about a possible Chapter 11 filing, which could come as soon as this week. Several vendors, fearing a filing, tightened their shipping terms with Sears, according to a Debtwire report from last week. Reuters reported early on Thursday that the retailer has missed payments to vendors, adding to imminent bankruptcy concerns. 

And then, at about 8:00 a.m. Thursday, The Wall Street Journal reported that a group of lenders — major banks including Bank of America, Wells Fargo and Citigroup — are pushing for Sears to liquidate in Chapter 7 rather than reorganize in Chapter 11. The Journal is also reporting that Lampert, who has loaned Sears hundreds of millions of dollars through ESL, is not going to bail out the retailer ahead of its debt payment due Monday. 

What happened? Some analysts and investors thought Sears might keep on keeping on — through store closures, cost cuts, asset sales, loans from ESL and debt reduction — the way it has for years amid rampant bankruptcy speculation.

It could be that Lampert's fellow creditors to Sears didn't bite on his restructuring proposal, as it would have required many to take a financial haircut, trading out debt for longer-term debt or equity in a company with a rock-bottom stock price. (Sears stock has rarely exceeded $3 a share this year and was trading at less than a dollar before this week's bankruptcy stories.)

"A lot of lenders won't do something outside of a bankruptcy filing," Joe Baldiga, a partner and co-chair of Mirick O'Connell, told Retail Dive in an interview. "Once it occurs, debtors have more power in bankruptcy court, they have a bit more leverage. Some of these third-party lenders may not have as much discretion outside of the bankruptcy process, with it being imposed upon them."

Yet it's also possible that multiple stakeholders see Chapter 11 as being to their benefit. "The reality is, there ... could be some things they could achieve through the bankruptcy process that couldn't be achieved otherwise," Philip Emma, retail analyst with Debtwire, said in an interview. He pointed to leasehold interests, various kinds of contracts, pension liabilities and balance sheet restructuring that could be addressed more readily and quickly in a bankruptcy process.

Eddie Lampert's many hats

If Sears does indeed go into bankruptcy court, the case is almost certain to be legally fraught or, at the very least, weird. "The Sears situation with Mr. Lampert and his ties to Sears does seem to be fairly unique," Baldiga said.

Debtwire's Emma pointed out that Lampert has three major roles around Sears — manager, major lender and majority stockholder — that are usually filled by separate players in a bankruptcy case. And really, Lampert has five roles, Emma added, pointing also to his role as landlord to Sears (through the Seritage Growth Properties real estate spinoff that Lampert chairs and co-owns) and a supplier to Sears (through his investments in Land's End).

Lampert's lending to Sears could give him unusual leverage in a bankruptcy case, where secured lenders are typically first in line to proceeds from a reorganization or liquidation.

Emma estimates, based on Sears 10-Ks, that Lampert and other insiders own more than $2.4 billion of funded debt across various agreements. (In its last quarterly report, the company said it had about $3.5 billion in total long-term debt and capitalized lease obligations on its books and another $1.3 billion in short-term borrowings.)

The sheer number of roles Lampert plays, and their potential for conflict with one another, could prove legally explosive in a court case, where lenders further down the priority chain often rely on lawsuits around fraudulent transfers and other ownership conflicts as leverage or to recoup lost investments.

Given Lampert's many hats at Sears, Brian Kochisarli, an attorney with Davidoff Hutcher & Citron, said in an interview that he expects some lenders would litigate to claw back some of the assets of the company that have been sold off previously, should there not be enough asset value to pay off the full debt in bankruptcy.

'Broken operationally' 

The ultimate fate of Sears is still very much up in the air. The Journal's report that banks are pressing for liquidation hints that some heavy players see little value in Sears as a going concern, just as the lenders who ultimately bought and liquidated Bon-Ton in bankruptcy did so because they saw little future for that department store retailer.

"If [Sears] was profitable at the operating level there may be some hope that after restructuring it could rebuild its assets and pay down further debt," GlobalData Retail Managing Director Neil Saunders said in emailed comments. "However, this is not the case. The latest numbers show that in the half year to August, the company made a huge operating loss of $419 million. In our view, this is a company that is broken operationally as well as financially."

S&P analyst Robert Schulz told Retail Dive in an interview that Sears still is an asset-rich retailer, unlike Toys R Us, which initially tried to reorganize before lenders forced it into liquidation after a terrible holiday season. Those assets — remaining after years of divesting riches like the Craftsman brand and owned real estate — could make a Sears liquidation a more attractive scenario to some lenders.

But Emma points out that "it's not a foregone conclusion that they don't come out of it with some way to revitalize business." Pointing to Toys R Us and Bon-Ton, he added that those retailers could not find a sponsor that was willing to put their money behind the company to carry it out of bankruptcy and beyond. Sears, potentially, does have such a sponsor in Lampert.

"It's not inconceivable that the debt structure allows him to retain ownership and control coming off bankruptcy," Emma said.

Where will Sears sales go?

Sears could end up closing some or all of its stores in a potential bankruptcy, depending on whether it reorganizes or liquidates. In either case, other department stores and retailers could benefit.

Looking at shopper overlap data, Cowen and Co. analysts led by Oliver Chen found that Walmart and Target, followed by J.C. Penney, Kohl's and Macy's, are "well-positioned to benefit" if Sears stores close. Specifically, they found that 92% of Sears shoppers shop at Walmart, 75% at Target, 56% at Penney, 55% at Kohl's and 54% at Macy's. There is also overlap with off-price retailers, including the TJX Cos. brands, Ross and Burlington.

Emma called J.C. Penney a "natural" peer comparison to Sears, implying that Penney — which has financial and retail troubles of its own — could grab some sales in a Sears bankruptcy.

Penney has already been chasing after Sears customers as the latter has shuttered more than 500 stores since the beginning of 2017. Penney executives have trumpeted double-digit comparable sales growth in appliances in past periods, after Penney beefed up its appliance offering to go after a key category for Sears. The retailer has also benefited from the liquidation of Bon-Ton, executives have said.

Schulz pointed to a spike in Penney's stock following news of a potential Sears filing and said that appliances — where Sears has long performed well with its Kenmore brand (which Lampert wants to buy) — represented the category that might have the most measurable impact on other retailers. Other category sales lost by Sears might not go anywhere, or make a measurable impact on other retailers, Schulz added.

Again, whether Sears reorganizes or liquidates, or files at all, will determine how the market shakes out. But even if the company is saved in or outside of bankruptcy, few outside observers have a sunny view of the retailer's future.

"As the dust continues to settle, Sears makes for a fascinating case of how a decline can take years," Tim Barrett, consultant at Euromonitor International, said in emailed comments. "The company hasn't been relevant for a decade and it's in this slow slide towards irrelevance that we can learn the most."