Sears’s losses could become most valuable assets

Bloomberg

The losses that drove Sears Holdings Corp. into bankruptcy could end up being a valuable multi-billion dollar asset because of tax breaks — especially for its most notable creditor and Chairman, Eddie Lampert.
As of the retailer’s bankruptcy on October 15, Sears estimated it had net operating losses it could use to offset $5 billion of future taxable income, and separate tax credits of around $900 million. These are the most valuable assets Sears has, and under US tax law, they could disappear in bankruptcy if another company or investor takes the company over.
The assets are so prized, that Sears has said they will help its efforts to reorganise. A new, restructured Sears is more attractive with them, and could even use them to buy up another company. But while its survival is up in the air, the tax assets also means Lampert has more of an incentive to keep Sears alive than other creditors. If he doesn’t step in with financing, keeping the tax asset alive, it’s not clear whether other investors will.
“He’s in an enviable position,” said Robert Willens, a New-York based tax consultant. Willens said he sees an advantage for Lampert in the bankruptcy. Essentially, if Sears reorganises and some of its debt converts to stock in a new company, Lampert could take more than half of the new stock without losing the tax assets, whereas other creditors can not.
In fact, says Roy Haya, head derivatives trader for Twenty-First Securities, a firm that specialises in structuring tax-efficient hedging transactions, it appears Lampert is now in a situation in which he can’t lose control of the company because of the assets, which only he appears able to take advantage of. “By buying up almost half the stock while lending the company more money, he effectively created a situation such that no one could force a change in ownership, even in Chapter 11,” Haya said. ESL declined to comment. Sears didn’t return calls for comment, but its bankruptcy lawyers said in court filings that the assets could help its “efforts towards a successful reorganisation.”
The fate of Sears has yet to be decided, with the company trying to reorganise but admitting it could be forced to liquidate. In its bankruptcy filing, it listed assets of $6.94 billion — not that much more than the tax losses. A big factor in whether the company survives will be whether Lampert extends a $300 million loan and offers to buy up a group of around 400 stores.
When a company has accumulated net operating losses, it can use them to offset future taxable income, which in turn cuts into its tax bills. The rule is meant to give struggling companies more breat-hing room. That means big benefits on the balance sheet. For example, Sears saved $1.7 billion in deferred taxes in 2017, according to its most recent quarterly filing.