Item 2.03.
Creation of a Direct Financial Obligation or an Obligation under an
Off-Balance
Sheet Arrangement of a Registrant.
Entry into Second Amendment to Second Amended and Restated Loan Agreement
On March 8, 2018, the Company, through Sears, Roebuck and Co., Kmart Stores of Illinois LLC, Kmart of Washington LLC, Kmart Corporation, SHC Desert
Springs, LLC, Innovel Solutions, Inc., Sears Holdings Management Corporation, Maxserv, Inc. and Troy Coolidge No. 13, LLC (collectively, Borrowers), entities wholly-owned and controlled, directly or indirectly by the Company,
entered into a Second Amendment (the Second Amendment) to the Second Amended and Restated Loan Agreement, dated as of October 18, 2017 (as amended, including pursuant to the Second Amendment, the Loan Agreement), with
JPP, LLC and JPP II, LLC (collectively, the Lenders). Pursuant to the Second Amendment, the Borrowers borrowed an additional $100 million (the Incremental Loan) from the Lenders. After giving effect to the Incremental
Loan, the aggregate principal amount outstanding under the Loan Agreement was $621.9 million. Mr. Edward S. Lampert, the Companys Chief Executive Officer and Chairman, is the sole stockholder, chief executive officer and
director of ESL Investments, Inc., which controls JPP, LLC and JPP II, LLC. The Incremental Loan matures on July 20, 2020. The Company expects to use the proceeds of the Incremental Loan for general corporate purposes.
The Incremental Loan will have an annual interest rate of LIBOR plus 9.00%, with accrued interest payable monthly. In addition to the Incremental Loan, as of
March 5, 2018, under the Loan Agreement there were $379.2 million aggregate principal amount of outstanding loans maturing July 20, 2020, for which the interest rate was increased to LIBOR plus 9.00% in connection with the Second
Amendment, as well as $142.7 million aggregate principal amount of outstanding loans maturing April 23, 2018 (subject to extension to July 6, 2018), for which the interest rate remains 11.0%. As with the existing loans under the Loan
Agreement, the Incremental Loan is guaranteed by the Company and is currently secured by a first priority lien on certain real properties owned by the Borrowers. No upfront or funding fees will be paid in connection with the Incremental Loan.
The Loan Agreement includes certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of the
real property collateral. The Loan Agreement has certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty,
and bankruptcy or insolvency proceedings. If there is an event of default, the Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have under the Loan Agreement and
related documents (including against the collateral), and require the Borrowers to pay a default interest rate equal to the greater of (i) 2.5% in excess of the base interest rate and (ii) the prime rate plus 1%.
The foregoing description of the Second Amendment, the Incremental Loan and the Loan Agreement does not purport to be complete and is qualified in its
entirety by reference to the Second Amendment, a copy of which is filed herewith as Exhibit 10.1 and is incorporated by reference herein.
Entry into
Credit Agreement
On March 14, 2018, the Company, through SRC O.P. LLC, SRC Facilities LLC and SRC Real Estate (TX), LLC (collectively, the
Secured Loan Borrowers), entities wholly-owned and controlled indirectly by the Company, entered into a Credit Agreement (the Credit Agreement) with the lenders party thereto (collectively, the Secured Lenders),
UBS AG, Stamford Branch, LLC, as administrative agent, and UBS Securities LLC, as lead arranger and bookrunner. The Credit Agreement provides for a $200 million term loan (the Secured Loan) that is secured by the Secured Loan
Borrowers interests in 138 real properties that were released from a ring-fence arrangement with the Pension Benefit Guaranty Corporation.
The
Secured Loan is guaranteed by the Company and certain of its subsidiaries. The Secured Loan bears interest at an annual interest rate of LIBOR plus 6.5% for the first three months the Secured Loan is outstanding, LIBOR plus 7.5% for the fourth
through the sixth month the Secured Loan is outstanding and LIBOR plus 8.5% for the seventh through the ninth month the Secured Loan is outstanding. Accrued interest is payable monthly during the term of the Secured Loan. The Secured Loan matures on
December 14, 2018. The Company will use the proceeds of the Secured Loan to make a contribution to the Companys pension plans.
The Company paid an
upfront commitment fee of 1.5% of the principal amount of the Secured Loan, and paid an arrangement fee to UBS Securities LLC. To the extent permitted under other debt of the Company or its affiliates, the Secured Loan may be prepaid at any time in
whole or in part, without penalty or premium. The Secured Loan Borrowers are required to apply the net proceeds of the sale of any real property collateral for the Secured Loan to repay the Secured Loan.
The Credit Agreement includes certain representations and warranties, indemnities and covenants, including with respect to the condition and maintenance of
the real property collateral. The Credit Agreement has certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or
warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the Secured Loan Lenders may declare all or any portion of the outstanding indebtedness to be immediately due and payable, exercise any rights they might have
(including against the collateral), and require the Secured Loan Borrowers to pay a default interest rate of 2.0% in excess of the base interest rate.
Entry into Mezzanine Loan Agreement
On March 14, 2018,
the Company, through SRC Sparrow 2 LLC (the Mezzanine Loan Borrower), an entity wholly-owned and controlled indirectly by the Company, entered into a Mezzanine Loan Agreement (the Mezzanine Loan Agreement) with JPP, LLC and
JPP II, LLC, as lenders (collectively, the Mezzanine Loan Lenders), and JPP, LLC, as administrative agent. Mr. Edward S. Lampert, the Companys Chief Executive Officer and Chairman, is the sole stockholder, chief executive officer
and director of ESL Investments, Inc., which controls JPP, LLC and JPP II, LLC. The Mezzanine Loan Agreement provides for a $240 million term loan (the Mezzanine Loan) that is secured by a pledge of the equity interests in SRC O.P.
LLC, the direct parent company of the entities that own the 138 real properties that secure the obligations of the Secured Loan Borrowers under the Credit Agreement.
The Mezzanine Loan Agreement contains an uncommitted accordion feature pursuant to which the Mezzanine Loan Borrower may incur additional loans
(Additional Mezzanine Loans) of not more than $200 million in aggregate, subject to certain conditions set forth in the Mezzanine Loan Agreement and the Credit Agreement, including that the Additional Mezzanine Loans shall not
exceed an amount equal to the principal amount of the Secured Loan repaid by the Secured Loan Borrowers.
The Mezzanine Loan bears interest at an annual
interest rate of LIBOR plus 11.0%, with accrued interest payable monthly during the term of the Mezzanine Loan. The Mezzanine Borrowers paid an upfront commitment fee equal to 1.8% of the principal amount of the Mezzanine Loan. The Mezzanine Loan
matures on July 20, 2020. The Company will use the proceeds of the Mezzanine Loan to make a contribution to the Companys pension plans.
The
Mezzanine Loan is guaranteed by the Company and the same subsidiaries that guarantee the Secured Loan. To the extent permitted under other debt of the Company or its affiliates, the Mezzanine Loan may be prepaid at any time in whole or in part,
without penalty or premium. Following repayment in full of the Secured Loan, the Mezzanine Loan Borrower is required to apply the net proceeds of the sale of any real property that served as collateral for the Secured Loan to repay the Mezzanine
Loan.
The Mezzanine Loan Agreement includes certain representations and warranties, indemnities and covenants, including with respect to the condition
and maintenance of the related real property. The Mezzanine Loan Agreement has certain events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy
of representation or warranty, and bankruptcy or insolvency proceedings. If there is an event of default, the Mezzanine Lenders may declare all or any portion of the outstanding Mezzanine Loan to be immediately due and payable, exercise any rights
they might have (including against the equity interests pledged as collateral), and require the Mezzanine Loan Borrowers to pay a default interest rate of 2.0% in excess of the base interest rate.