Sears approved to sell medium-term notes; true-up mechanism ordered

By Caroline Salls

Pittsburgh, Nov. 19 – Sears Holdings Corp. received court approval to sell series B medium-term notes issued by Sears Roebuck Acceptance Corp. (SRAC), according to an order filed Monday with the U.S. Bankruptcy Court for the Southern District of New York.

As of the date of its bankruptcy filing, the company said there were $2.3 billion of the notes outstanding, plus interest, fees, expenses, charges and other related obligations. A total of $1.4 billion of the notes are held by non-debtor affiliate Sears Reinsurance Co. Ltd.

Sears said in the motion that is has a “unique opportunity to sell the MTNs and maximize their value for the benefit of all creditors,” but only if the sale can be completed quickly.

The company said the proposed sale is supported by the official committee of unsecured creditors appointed for its Chapter 11 cases.

According to the motion, the loss percentage, and therefore, the settlement amount of the notes will be determined at an auction conducted by the International Swaps and Derivatives Association.

Whether or not a buyer or seller of related credit protection participates in the auction, Sears said the sellers are obligated to pay the settlement amount on the securities to which they are a party.

In addition, Sears said the auction ensures that a buyer of credit protection who wishes to receive at least the full par amount of the bonds for which it has purchased protection is able to do so by selling its bonds at the auction and receiving a recovery percentage and a loss percentage for a total of 100%.

As a result, the company said sellers of credit protection are likely to purchase qualifying obligations at the auction at a price higher than they would be willing to pay outside the auction.

Although Sears said the debtors are not eligible to sell the notes directly into the auction because they are not credit protection buyers, the company said “they can benefit from the spike in the price of the bonds immediately before the auction by selling the MTNs to entities that are.”

Judge Robert D. Drain said in Monday’s order that, in light of the fact that the sale of the notes and the deposit of the proceeds into a winddown account may affect the assets and liabilities of the debtors in connection with the Chapter 11 plan process, Sears, the creditors’ committee and the lender agents must agree on a true-up mechanism to ensure that no debtor’s estates or creditors is adversely affected by the notes sale or the placement of the proceeds into a winddown account.

The true-up mechanism will be subject to court approval and, if the parties cannot reach an agreement on a true-up mechanism, the court will resolve any dispute.

Sears is a retailer based in Hoffman Estates, Ill. The company filed bankruptcy on Oct. 15 under Chapter 11 case number 18-23538.

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