Time is running out for Sears, the retailer's largest investor and chief executive warned Monday.
With the company facing a large loan payment due next month, Edward Lampert, who serves as both Sears' CEO and its most influential shareholder and lender, said it needed to drastically restructure its debts to avoid "alternatives."
Those alternatives include bankruptcy.
Lampert's hedge fund, ESL Investments has proposed a series of deals that would reduce the retailer's $5.6 billion debt load. They include selling off many of its remaining stores and asking lenders to exchange their loans for equity stakes in the beleaguered company.
The proposal, which ESL outlined in a securities filing Monday, amounts to a wholesale financial restructuring of the company outside of a Chapter 11 bankruptcy filing.
The deal would reduce Sears' debt to about $1.2 billion, freeing up cash to reinvest in its struggling retail operations.
While Sears has been troubled for years, the proposal signals a heightened urgency from Lampert. His firm's proposal warns that Sears now faces "significant near-term liquidity constraints," with $134 million in debt coming due in a few weeks.
It was not clear whether the company's lenders would accept an offer to take an equity stake in the company because it is premised on a belief that Sears has a future in retail. Analysts say that is far from certain, as the company continues to lose money and customers to more nimble and digitally adept competitors.
The latest rescue attempt is also complicated because ESL is controlled by Lampert, who has an unusual role at Sears. He is chief executive and chairman of the retailer. And in addition to being the largest shareholder, his hedge fund holds roughly 40 percent of Sears's debt, giving him claim on a great deal of the company's assets, particularly its real estate.
A bankruptcy filing would probably reduce what Lampert could recover, as fees to lawyers and advisers eat into what is left over to pay him and other creditors. Toys R Us, which filed one of the largest retail bankruptcies in history in September 2017, paid hundreds of millions of dollars in legal fees while being forced to liquidate all its U.S. stores.
"Sears must act immediately to have sufficient runway to continue its transformation," ESL said in its proposal Monday.
This is not the first time Lampert has sought to do a deal with a company where he holds significant sway.
Last month, ESL offered to buy Sears' Kenmore brand for $400 million. A special committee of the retailer's board is still reviewing that offer.
In his biggest deal, three years ago, he and other investors formed a real estate company called Seritage and paid $2.7 billion for about 235 Sears stores, including many in choice locations. Many of those are being turned into upscale offices, condominiums and restaurants, which has been a boon for Lampert and other Seritage investors.
Real estate is a key component of Lampert's latest idea. He proposes that Sears' lenders - whose loans are secured by the company's stores - stop collecting interest for a year while the company tries to sell those stores.
After a year, if Sears fails to sell enough stores to pay off $1.4 billion in debt, then it will sell the stores to the lenders for a price equal to the value of their debt.
Lampert has the most at stake. His hedge fund owns roughly $1.1 billion of Sears debt secured by stores, according to the securities filing.
"We are ready and willing to move as quickly as possible to help the company transform into a business that is better positioned to thrive in the 21st century," ESL said in its proposal.