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File photo of people walking past a Sears store in downtown Vancouver.

Andy Clark/REUTERS

Struggling Sears Canada Inc. plans to file for court protection from its creditors soon with the goal of closing about one-third of its 94 department stores and keeping the rest running, industry sources say.

But by Wednesday afternoon, the retailer still faced a key hurdle in its restructuring blueprint: It had yet to finalize crucial debtor-in-possession (DIP) financing with some financial firms, the sources said. DIP financing is specifically designed for distressed companies that are shielded from creditors in a court insolvency process. The DIP financing would be essential for Sears to revamp, shrink its department store portfolio by roughly 30 and continue to operate, the sources said.

Sears's board of directors was scheduled to meet Wednesday evening to review the DIP financing efforts in a bid to move ahead with a filing under the Companies Creditors Arrangement Act, sources said.

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Related: Sears Canada raises 'significant doubt' about its future

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"It's going to take a couple of things to get over the finish line," a source familiar with the situation said on Wednesday afternoon, adding that getting DIP financing was the critical factor. The filing "could be as early as tomorrow [Thursday] but it might not be."

Sears has grappled with declining sales and profits for years under shifting leaders and strategies. It has sold off major assets, including leases of its best-located stores, and benefited from cheap rents as a result of its status as a mall anchor tenant that, in theory, lures shoppers to the centres, although Sears has failed for a while to be a big draw.

Still, Brandon Stranzl arrived at Sears as its executive chairman almost two years ago with a vision to revive the retailer.

With seemingly unbounded energy, Mr. Stranzl raced to bolster its e-commerce, add discount designer fashions and match appliance and other prices to those of e-commerce rivals.

And while Sears's results have been dismal, it succeeded in its first quarter in posting a 2.9-per-cent increase in its same-store sales, which is considered an important retail measure. Nevertheless, Sears hinted last week it was running out of time by disclosing that its financial situation raises "significant doubt as to the company's ability to continue as a going concern."

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It said it was looking at strategic alternatives, such as a sale or restructuring and hired BMO Nesbitt Burns as its financial adviser and Osler Hoskin & Harcourt LLP for legal advice.

Osler's insolvency team has handled some of the country's largest retail failures, including the collapse of Target Canada in 2015, which resulted in it closing all of its 133 stores within three months. With many of the Target stores still vacant, landlords are loath to contemplate the spectre of empty Sears outlets.

Tracy Sandler, a partner at Osler's insolvency practice who oversaw the Target case, did not reply to e-mailed questions; nor did a Sears spokesman.

Sears had expected to borrow up to $175-million, secured against its owned and leased real estate, as part of the second tranche of a $300-million loan from Great American Capital Partners and KKR Capital Markets. But they were only ready to lend up to $109-million to the retailer, prompting it last week to issue its warning and look at its options.

Sears shares tumbled 22.5 per cent on the Toronto Stock Exchange on Wednesday. They have fallen about 72 per cent since the beginning of 2017.

Liquidating all of Sears's stores – it has about 165, including home and outlet stores – is "not the likely outcome," a source said.

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The talks to firm up DIP financing were still under way on Wednesday. "They were still negotiating fairly serious points this morning," the source said. "You're not just dealing with one lender, you're dealing with a bunch and they all have to get on board. So these things sometimes don't just happen. … It will get done."

Sears would like to keep two-thirds to three-quarters of its 16,000 employees under its restructuring plan, the source suggested. Still, "a lot of jobs are going to go," a source said.

Under Mr. Stranzl, Sears started to redesign stores under a smaller footprint to focus on so-called off-price discounted designer apparel and home decor lines – borrowing from the successful Winners playbook – and affordable new private-label products that can generate higher profit margins if sold in large volumes.

Over the years, a key beneficiary of Sears Canada's asset sales has been Edward Lampert, CEO of Sears Holdings Corp., through his hedge fund, ESL Investments Inc., and associated firms, which owned about 45 per cent of Sears Canada at the end of April. Shares of Sears Holdings, which owns roughly 12 per cent of Sears Canada, dropped 5.4 per cent to $6.43 (U.S.) on Nasdaq.

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