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Pension Funds

Sears reaches deal with PBGC to end ‘ring-fence’ for 140 properties

Sears Holdings Corp., Hoffman Estates, Ill., reached an agreement with the Pension Benefit Guaranty Corp. on Tuesday to release about 140 Sears properties from an earlier "ring-fence arrangement" with the PBGC in exchange for contributing $407 million to its U.S. pension plans.

Following the $407 million contribution, Sears will be relieved of its obligation to make further pension contributions for roughly two years, with the exception of a $20 million supplemental pension payment in the second quarter of 2018, the company said Wednesday in a news release.

Sears "expects to raise the $407 million through a sale of properties and/or financing secured by the properties," according to the news release.

When Sears entered the "ring-fence arrangement" with the PBGC in 2016, Sears agreed to "continue to protect or, 'ring-fence,' the assets of certain already-existing special-purpose subsidiaries that held real estate and/or intellectual property assets," and for the subsidiaries to grant the PBGC a "springing lien" on the protected assets for five years, a company spokesman said in an email.

Sears already amended the 2016 agreement once in March to protect its pension fund assets following the sale of Sears' Craftsman brand to Stanley Black & Decker Inc. Under the amendment, Sears agreed to provide the PBGC with a lien on $100 million of real estate assets in exchange for a $250 million contribution from Stanley Black & Decker, due in three years, and a 15-year income stream from Stanley Black & Decker's future sales of Craftsman products.

Also in March, Sears announced that it planned to contribute $312 million to its U.S. pension plans in 2017. How much of that has already been contributed could not immediately be learned, although the news release noted that Sears will be required to make a $37 million contribution in December. The company contributed $314 million and $299 million to its U.S. pension plans in 2016 and in 2015, respectively. Since the 2005 merger of Sears and Kmart, Sears has contributed roughly $4.5 billion.

As of Jan. 28, Sears' U.S. pension assets totaled $3.57 billion and projected benefit obligations, $5.17 billion, for a funding ratio of 69.1%, compared to 60.5% the prior year, according to its most recent 10-K filing with the Securities and Exchange Commission.

"This agreement with the PBGC is another positive step forward which, upon closing, will provide our company with financial flexibility while supporting our commitment to honor our obligations to the associates and retirees covered by the pension plans," said Edward S. Lampert, Sears Holdings' chairman and CEO, in the release. "While the lower interest-rate environment has had a significant, unfavorable impact on the pension plans' funding, Sears Holdings has demonstrated its commitment to honoring this obligation."

Earlier this year, Sears purchased two group annuity contracts with MetLife to transfer about $1 billion in total U.S. pension liabilities.