PBGC, Sears Reach Chapter 11 Bankruptcy Settlement

Deal cleared way for court to OK ESL Investment’s $5.2 billion takeover of the retailer.

The Pension Benefit Guaranty Corp. (PBGC) has agreed to withdraw its objection to the proposed sale of Sears’ assets to hedge fund ESL Investments, which cleared the way for a US bankruptcy court judge to approve ESL founder and Sears Holdings Corp. Chairman Edward Lampert’s $5.2 billion takeover of the 126-year-old retailer.

The agreement allows the government-sponsored lifeboat for struggling pensions to assume responsibility for Sears’ two pension plans, which are covered under PBGC’s Single-Employer Insurance Program. 

Last month, the PBGC said it would assume responsibility for Sears’ two defined benefit pension plans, which cover approximately 90,000 workers and retirees at Sears, Roebuck and Co. and Kmart Corp. Sears filed for Chapter 11 protection in October, and the PBGC stepped in to become responsible for the plans because it said that Sears’ continuation of the plans is no longer viable.

According to court documents, the PBGC estimates that the Sears pension plans are collectively underfunded by approximately $1.4 billion, and have a funded level of just 64%. In its complaint, it had argued that as a result of the sale or liquidation of the company, the plans would not have assets available to pay benefits when due.

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Sears lawyer Ray Schrock reportedly told bankruptcy judge Robert Drain that the PBGC will receive an unsecured $800 million from the Sears bankruptcy estate. He also said the agency would get up to $80 million in proceeds from potential claims against ESL Investments Inc. surrounding its dealings with Sears.

The Wall Street Journal reported that as part of its settlement with Sears, the PBGC agreed not to challenge Lampert’s right to bid using $1.3 billion in debt instead of cash. It also said that a group of unsecured creditors argued that Lampert shouldn’t be able to rely on loans he previously extended to Sears when he used stock buybacks, spinoffs, and dividends to make money while stripping Sears of its assets.

The PBGC said that it expects its guarantees will cover the vast majority of pension benefits earned under the plans, and added that it will not have a significant effect on its financial statements because the claim has already been included in the agency’s fiscal year 2017 and 2018 financial statements.

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