Sears Holdings Corporation
Omega Advisors Seeks to Invalidate Sale of Unlisted MTNs to Cyrus Capital, Sears Re Lockup Agreement; Decries Auction as ‘Unfair, Opaque, and Uncompetitive’
Fri 12/07/2018 06:10 AM
Relevant Document:
Motion
On Thursday evening, Dec. 6, Omega Advisors Inc. filed a motion seeking to invalidate the sale to Cyrus Capital Partners LP of approximately $650 million in medium-term notes, or MTNs, issued by Sears Roebuck Acceptance Corp., or SRAC, that were "not offered or noticed for sale to any other bidder." The motion also seeks to invalidate what Omega characterizes as "the clandestine agreement” between the debtors and Cyrus not to sell an additional $1.4 billion in MTNs held by non-debtor affiliate Sears Reinsurance Co. Ltd., or Sears Re.
Sears announced on Tuesday that it sold $880.7 million of MTNs to Cyrus for $82.5 million in an auction. In conjunction, Cyrus agreed to waive all rights to receive payments of principal, interest, fees or other amounts with respect to $629.5 million of the MTNs.
According to Omega's motion, the auction "was not a fair, transparent, and competitive bidding process," as required by the court’s Nov. 19 sale order and section 363(b) of the Bankruptcy Code, "because the bidders (aside from Cyrus) had no notice of what was actually being sold." Omega argues that the portions of the sale of the MTNs that exceeded the scope of the sale order and section 363(b) of the Bankruptcy Code should be invalidated because “the notes were sold without proper notice and outside of the fair, transparent, and competitive bidding process authorized by the Court."
According to the filing, Omega “is an interested bidder for the MTNs and participated in the Auction.”
Specifically, Omega asks the court to issue an order confirming the scope of the Nov. 19 sale order authorizing the sale of the MTNs. The motion also seeks to invalidate “any portions of the sale that exceeded such scope as ultra vires.” Finally, Omega asks the court to clarify that “the advance good-faith findings for the purchaser do not extend to unauthorized sale of Unlisted MTNs or the Lockup Agreement with respect to the Sears Re MTNs” (emphasis added). The motion explains that an order providing the relief requested would “provide additional value to the Debtors, as Omega and, upon information and belief, other market participants, remain interested bidders.”
Omega complains that in a Dec. 4 8-K disclosure, the debtors disclosed “for the first time” that “while the Debtors had announced a proposed sale of ‘no more than’ $251 million in MTNs in an auction (the ‘Auction’) authorized by the Sale Order, and had told the Court that the additional $1.4 billion in MTNs held by Sears Re were not part of the relief being sought, in fact the Debtors sold all of their nearly $900 million in MTNs, and agreed to refrain from selling Sears Re’s $1.4 billion in additional MTNs at the Auction.” Omega argues that the debtors effectively sold the value of their entire lot of $2.3 billion of MTNs to Cyrus, and that no other bidder that relied on the court documents was aware of the debtors’ efforts.
The motion charges that Cyrus interfered with the MTN sale up through and including the auction in order to minimize potential losses on credit default swaps it sold on SRAC debt, and further attempted to destroy the value of the MTNs to the debtors so it would not need to try to buy them. Omega also notes that Cyrus was the only objector to the sale motion, and though it ultimately “capitulated,” it requested new language in the sale order “designed specifically to render the MTNs undeliverable in an ISDA auction and therefore destroy their value in the eyes of CDS protection buyers.” Omega asserts that Cyrus informed auction participants that the MTNs would not be deliverable in the auction and referenced this new language, in an effort to lower the MTNs price and chill bidding, which Omega says “worked.” Omega contends that Cyrus’ efforts may have violated the automatic stay. Nonetheless, Omega describes that Cyrus was outvoted by other members of the ISDA DC, which determined the MTNs would be deliverable in the auction.
Cyrus also “secretly” negotiated additional conditions to its purchase agreement causing the auction to be “unfair, opaque, and uncompetitive, as well as inconsistent with the notice provided to bidders,” says Omega. First, according to the motion, Cyrus negotiated to purchase not only the listed MTNs at auction, but also unlisted MTNs that were expressly excluded, in contravention of the “clear statement” in the auction notice. Cyrus did not pay any additional consideration beyond its $82.5 million bid to purchase the unlisted MTNs, the motion adds.
Next, Omega says, the debtors “agreed as part of the sale ‘on behalf of themselves and their Subsidiaries, not to sell, transfer, or assign any MTNs not included as part of this transaction to any non-Debtor entity other than a transfer or assignment pursuant to a non-consensual order of a court of competent jurisdiction with respect thereto.’” According to the motion, this lockup agreement “purports” to prevent non-debtor Sears Re from selling the $1.4 billion of Sears Re MTNs it holds to CDS buyers, “abandoning tens of millions of dollars in additional proceeds.” This lockup agreement, Omega continues, is also outside the scope of the sale order and auction notice for the listed MTNs. Further, Omega says that It also “directly contradicts” the record from the sale hearing that the Sears Re MTNs were not part of the auction.
Because Omega and other bidders were not aware that the auction “had actually transferred control of all $2.3 billion in MTNs, instead of the noticed amount of $251 million,” the motion stresses that the bidders continued to make offers of “significant value” to purchase additional MTNs they believed were still available. If these bidders had known that “all $2.3 billion in MTNs were for sale - and that there would thus be no subsequent opportunity to purchase any other MTNs,” Omega asserts that they along with the other bidders would have been “incentivized to bid substantially higher” at auction and “would have provided more value to the Debtors than the $82.5 million that was paid by Cyrus.”
Omega characterizes the unlisted MTNs sale as a “backroom negotiation” and intent to lock up the Sears Re MTNs, without notifying auction participants until two weeks after the auction, as rendering the auction “unfair, opaque, and uncompetitive, in violation of the Sale Order and 11 U.S.C. § 363(b), and raises the specter that Cyrus may have used its influence as a significant creditor in the bankruptcy as well as its influence as a member of the ISDA DC to create perhaps the least value-maximizing auction ever conducted in a sale authorized by this Court.” Omega requests entry of an order voiding the portions of the sale that were ultra vires, in particular, the agreement to sell the unlisted MTNs and to lock up the Sears Re MTNs.
Omega attaches to the motion the following chart comparing the terms of the sale motion and order, the auction notice and the notice of the results of the MTNs auction:
A hearing on the motion is scheduled for Dec. 20, at 10 a.m. ET, with objections due Dec. 13, at 4 p.m. ET.
Omega is represented by Quinn Emanuel Urquhart & Sullivan. Quinn Emanuel had previously sent a comment letter on behalf of a group of Sears credit default swap holders to ISDA’s credit determinations committee today, asserting that Cyrus - through language added to the MTN sale order - was intending to try to obtain “an adverse finding as to deliverability of the MTNs and torpedo the very auction that the Order approved.” The comment letter reviewed by Reorg redacted the specific group members represented by counsel.
Motion
On Thursday evening, Dec. 6, Omega Advisors Inc. filed a motion seeking to invalidate the sale to Cyrus Capital Partners LP of approximately $650 million in medium-term notes, or MTNs, issued by Sears Roebuck Acceptance Corp., or SRAC, that were "not offered or noticed for sale to any other bidder." The motion also seeks to invalidate what Omega characterizes as "the clandestine agreement” between the debtors and Cyrus not to sell an additional $1.4 billion in MTNs held by non-debtor affiliate Sears Reinsurance Co. Ltd., or Sears Re.
Sears announced on Tuesday that it sold $880.7 million of MTNs to Cyrus for $82.5 million in an auction. In conjunction, Cyrus agreed to waive all rights to receive payments of principal, interest, fees or other amounts with respect to $629.5 million of the MTNs.
According to Omega's motion, the auction "was not a fair, transparent, and competitive bidding process," as required by the court’s Nov. 19 sale order and section 363(b) of the Bankruptcy Code, "because the bidders (aside from Cyrus) had no notice of what was actually being sold." Omega argues that the portions of the sale of the MTNs that exceeded the scope of the sale order and section 363(b) of the Bankruptcy Code should be invalidated because “the notes were sold without proper notice and outside of the fair, transparent, and competitive bidding process authorized by the Court."
According to the filing, Omega “is an interested bidder for the MTNs and participated in the Auction.”
Specifically, Omega asks the court to issue an order confirming the scope of the Nov. 19 sale order authorizing the sale of the MTNs. The motion also seeks to invalidate “any portions of the sale that exceeded such scope as ultra vires.” Finally, Omega asks the court to clarify that “the advance good-faith findings for the purchaser do not extend to unauthorized sale of Unlisted MTNs or the Lockup Agreement with respect to the Sears Re MTNs” (emphasis added). The motion explains that an order providing the relief requested would “provide additional value to the Debtors, as Omega and, upon information and belief, other market participants, remain interested bidders.”
Omega complains that in a Dec. 4 8-K disclosure, the debtors disclosed “for the first time” that “while the Debtors had announced a proposed sale of ‘no more than’ $251 million in MTNs in an auction (the ‘Auction’) authorized by the Sale Order, and had told the Court that the additional $1.4 billion in MTNs held by Sears Re were not part of the relief being sought, in fact the Debtors sold all of their nearly $900 million in MTNs, and agreed to refrain from selling Sears Re’s $1.4 billion in additional MTNs at the Auction.” Omega argues that the debtors effectively sold the value of their entire lot of $2.3 billion of MTNs to Cyrus, and that no other bidder that relied on the court documents was aware of the debtors’ efforts.
The motion charges that Cyrus interfered with the MTN sale up through and including the auction in order to minimize potential losses on credit default swaps it sold on SRAC debt, and further attempted to destroy the value of the MTNs to the debtors so it would not need to try to buy them. Omega also notes that Cyrus was the only objector to the sale motion, and though it ultimately “capitulated,” it requested new language in the sale order “designed specifically to render the MTNs undeliverable in an ISDA auction and therefore destroy their value in the eyes of CDS protection buyers.” Omega asserts that Cyrus informed auction participants that the MTNs would not be deliverable in the auction and referenced this new language, in an effort to lower the MTNs price and chill bidding, which Omega says “worked.” Omega contends that Cyrus’ efforts may have violated the automatic stay. Nonetheless, Omega describes that Cyrus was outvoted by other members of the ISDA DC, which determined the MTNs would be deliverable in the auction.
Cyrus also “secretly” negotiated additional conditions to its purchase agreement causing the auction to be “unfair, opaque, and uncompetitive, as well as inconsistent with the notice provided to bidders,” says Omega. First, according to the motion, Cyrus negotiated to purchase not only the listed MTNs at auction, but also unlisted MTNs that were expressly excluded, in contravention of the “clear statement” in the auction notice. Cyrus did not pay any additional consideration beyond its $82.5 million bid to purchase the unlisted MTNs, the motion adds.
Next, Omega says, the debtors “agreed as part of the sale ‘on behalf of themselves and their Subsidiaries, not to sell, transfer, or assign any MTNs not included as part of this transaction to any non-Debtor entity other than a transfer or assignment pursuant to a non-consensual order of a court of competent jurisdiction with respect thereto.’” According to the motion, this lockup agreement “purports” to prevent non-debtor Sears Re from selling the $1.4 billion of Sears Re MTNs it holds to CDS buyers, “abandoning tens of millions of dollars in additional proceeds.” This lockup agreement, Omega continues, is also outside the scope of the sale order and auction notice for the listed MTNs. Further, Omega says that It also “directly contradicts” the record from the sale hearing that the Sears Re MTNs were not part of the auction.
Because Omega and other bidders were not aware that the auction “had actually transferred control of all $2.3 billion in MTNs, instead of the noticed amount of $251 million,” the motion stresses that the bidders continued to make offers of “significant value” to purchase additional MTNs they believed were still available. If these bidders had known that “all $2.3 billion in MTNs were for sale - and that there would thus be no subsequent opportunity to purchase any other MTNs,” Omega asserts that they along with the other bidders would have been “incentivized to bid substantially higher” at auction and “would have provided more value to the Debtors than the $82.5 million that was paid by Cyrus.”
Omega characterizes the unlisted MTNs sale as a “backroom negotiation” and intent to lock up the Sears Re MTNs, without notifying auction participants until two weeks after the auction, as rendering the auction “unfair, opaque, and uncompetitive, in violation of the Sale Order and 11 U.S.C. § 363(b), and raises the specter that Cyrus may have used its influence as a significant creditor in the bankruptcy as well as its influence as a member of the ISDA DC to create perhaps the least value-maximizing auction ever conducted in a sale authorized by this Court.” Omega requests entry of an order voiding the portions of the sale that were ultra vires, in particular, the agreement to sell the unlisted MTNs and to lock up the Sears Re MTNs.
Omega attaches to the motion the following chart comparing the terms of the sale motion and order, the auction notice and the notice of the results of the MTNs auction:
(Click HERE to enlarge.)
A hearing on the motion is scheduled for Dec. 20, at 10 a.m. ET, with objections due Dec. 13, at 4 p.m. ET.
Omega is represented by Quinn Emanuel Urquhart & Sullivan. Quinn Emanuel had previously sent a comment letter on behalf of a group of Sears credit default swap holders to ISDA’s credit determinations committee today, asserting that Cyrus - through language added to the MTN sale order - was intending to try to obtain “an adverse finding as to deliverability of the MTNs and torpedo the very auction that the Order approved.” The comment letter reviewed by Reorg redacted the specific group members represented by counsel.
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