Requiring Sears Canada Inc. to continue special payments to its defined benefit pension plan would put the company’s operations at risk given its liquidity constraints, the company’s chief financial officer said in an affidavit filed as part of the restructuring proceedings this week.
In describing the company’s difficulties, Billy Wong noted that the debtor-in-possession (DIP) credit agreements that are financing Sears’ operations during the restructuring didn’t “provide for the continuation of the special payments after June 30, 2017.” The affidavit follows the company’s motion in June to suspend the special payments of $3.7 million per month — an amount imposed on the company to make up for its $266.8-million defined benefit pension plan shortfall — as it attempts to restructure under the Companies’ Creditors Arrangement Act. The Ontario Superior Court is to deal with the motion at a hearing on July 13.
“The DIP lenders have advised that they will not agree to a modification of the DIP budget that would include continuing special payments,” Wong wrote in his affidavit, which noted Sears requires $30 million in available cash in order to function and has $37 million in payroll obligations each month.
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Besides warning of the “catastrophic impact” of a full-scale shutdown of Sears that could result from the loss of the restructuring financing, Wong’s affidavit, filed on July 5, also provides details on the company’s current state, including in regards to its pension and benefits plans:
- The defined benefit pension plan has about 15,000 participants, including retirees, surviving spouses and former employees.
- The company has been paying about $7,000 per month as part of its obligations under its supplemental pension plan for those whose service ended at Jan. 1, 2010. For those whose service ended earlier, the benefits come from a trust fund. In the affidavit, Wong said the company believes it “would not be equitable” to continue the payments to the supplemental plan in light of its motion to stop paying the $3.7 million per month to the defined benefit component.
- For members of the supplemental pension covered by the trust, the plan had a windup deficit of $8.4 million as of Dec. 31, 2015. While the current funded status of the plan is unclear, the affidavit suggests there’s no deemed trust created by any windup because it’s not a registered pension. The company is also seeking to suspect any payments required to cover a shortfall in that portion of the supplemental plan.
- About 4,350 retirees and surviving spouses have health and dental coverage under the company’s post-retirement benefits plan at a cost of about $800,000 per month. The company is seeking to stop payments under the plan for all claims submitted and received after July 31, 2017. The company also has 3,700 people with life insurance coverage under the post-retirement benefits plan at a cost of $245,000 per month.
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