Orchard Supply Hardware Stores Corp (NASDAQ:OSH) (OTCBB:OSHSP) on Monday filed for Chapter 11 bankruptcy protection, revealed the filed documents in the court, says a report from Reuters. Majority of the assets will be acquired by the rival retailer Lowe’s Companies, Inc. (NYSE:LOW) for $205 million in cash.

Orchard Supply

The documents revealed that Orchard is under a lot of debt, and the present financial position does not allow the company to make scheduled payments for the debt. The first installment for the debt falls due in December 2013.

Orchard Supply Hardware Stores Corp (NASDAQ:OSH) (OTCBB:OSHSP) said in the court filing that the major portion of the debt is due to a “significant recapitalization dividends paid to Sears.” “The ever present prospect of violating the company’s leverage ratio covenants hampered many of its operational strategies.”

Orchard Supply: Chapter 11- the best option

As per the company, filing the Chapter 11 protection was the best option for the company and its stakeholders among all the alternatives evaluated by the management and the board. Orchard further told that it has secured $177 million in commitments for debtor-in-possession (DIP) financing. The commitment will help the meet the financial obligations during the Chapter 11 process.

Lowe’s a “stalking horse bidder”

Lowe’s Companies, Inc. (NYSE:LOW) will act as “stalking horse bidder” in the auction of Orchard Supply Hardware Stores Corp (NASDAQ:OSH) (OTCBB:OSHSP)’s assets. Lowe’s bid will act as a minimum offer for the assets meaning other players may bid for higher. If there are other higher bids then Lowe’s offer will be triggered after obtaining bankruptcy court approval.

Lowe’s Companies, Inc. (NYSE:LOW) plans to acquire a minimum of 60 Orchard’s neighborhood hardware and garden stores in California out of total 91. Apart from $205 million cash price, the acquisition also includes any payables owed to Orchard suppliers. Lowe’s plans to allow Orchard to operate as a separate standalone business. Orchard will retain the brand and management.

Other details

Last week, there have been reports that the specialty retailer is preparing to file for bankruptcy. The retailer posted a combined loss of $132.8 million in last two years. Eddie Lampert’s of RBS Partners LP with 21 percent stake is the biggest investor in the company as of May 13.

For the year 2012, company reported revenues of $657 million with total liabilities of $480.1 million and total assets of $441 million, reveals the court filing.

Sears Holdings Corp (NASDAQ:SHLD) acquired Orchard Supply Hardware Stores Corp (NASDAQ:OSH) (OTCBB:OSHSP) in 1996 for $415 million. Sears sold 20 percent of the stake in 1996 to Ares Management LLC, and the remaining stake in December 2011.

The bankruptcy process is to be completed within 90 days. On Friday, shares of the Orchard Supply Hardware Stores Corp (NASDAQ:OSH) (OTCBB:OSHSP) closed at $1.88. The stocks have gained more than 40 percent in last two weeks.