Sears Holdings – Wilmington Trust Objects to Cyrus Capital’s Junior DIP Loan, Questions Whether Terms Pass “Sound Business Judgment” Smell Test

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December 13, 2018 – Wilmington Trust, National Association (“Wilmington”), the Trustee in respect of the Debtors’ 6 5/8% Senior Secured Notes due 2018, objected to the Debtors’ motion requesting authority to enter into a proposed $200mn junior debtor-in-possession (“DIP”) financing arrangement (the “Junior DIP Loan”) with Cyrus Capital [Docket No. 1207] citing its view that there might well still be better terms offered elsewhere.  Specifically, Wilmington questions whether a deal with GACP Financing Co. (“GA”), previously favored by the Debtors and itself a replacement to similar proposed funding from Eddie Lampert’s ESL Investments Inc., might still be on the table.
The objection states, “The requirement that a debtor show that it made a reasonable effort to seek other sources of credit is rendered meaningless if, after that reasonable search, the debtor is free to obtain credit from any source on less favorable terms. ‘[T]he [C]ourt’s discretion under section 364 is to be utilized on grounds that permit reasonable business judgment to be exercised so long as the financing agreement does not contain terms that leverage the bankruptcy process and powers or its purpose is not so much to benefit the estate as it is to benefit a party-in-interest.’….Accordingly, before the Court can reach a determination that entry into the Junior DIP Loan with Cyrus is a proper exercise of the Debtors’ sound business judgment, assuming GA remains willing to provide the Junior DIP Loan, the Court must first determine, perhaps through a transparent auction in the courtroom, rather than through an opaque auction in the hallway outside the courtroom, that the Debtors have obtained the best available terms for the Junior DIP Loan.”

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