Sears’ New $400 Million Secured Loan: Another Sign of Trouble at the Venerable Retailer?

Last year, the 112-year old retailer J.C. Penney was regularly in the news – and it was rarely good.  The stock was in a free-fall, in the process of dropping from about $20 per share in May 2013 to a low of a little more than $6 dollars per share in late October.  Media reports were grim, focusing on the attempt and failure of the former Apple executive Ron Johnson to turn the business around.  But now, as we approach the critical holiday season, J.C. Penney’s stock has quietly reached more than $11 per share, with a market capitalization of $3.4 billion on $12.16 billion in revenue for the trailing twelve-month period.  While a far cry from J.C. Penney’s all-time high of more than $80 per share in March 2007, the company at least seams to have bought itself some time. 

Instead of J.C. Penney, this year it may be Sears Holding Corp., the owner and operator of the 120-year old Sears — as well as the 115-year old S.S. Kresge Corporation,  renamed Kmart 50 years ago — that faces intense media and vendor scrutiny as we head towards the holidays.   Sears’ stock is down almost 50% in the last year, with a market cap of $3.2 billion on trailing twelve-month revenue of just under $35 billion.

Sears is currently run by Eddie Lampert, the billionaire founder of the hedge fund ESL Investments, which owns approximately 48% of Sears’ equity (as well as a substantial portion of the secured notes issued by Sears).  In the early 2000s, Mr. Lampert launched a takeover of Kmart as the company was reorganizing in chapter 11. In 2005, Mr. Lampert orchestrated Kmart’s $12 billion buyout of Sears.  After four CEOs post buy-out, Mr. Lampert became CEO of Sears in January of 2013.  He is also the Chairman of the Board.

After reporting in late August that it had lost nearly $1 billion during the first half of the year on declining sales, Sears announced this week that ESL Investments and affiliated entities are providing the company with a $400 million short-term loan.  The loan matures on December 31, 2014, though it can be extended through February 28, 2015, if the company does not default and pays a 0.5% extension fee.  The loan is secured by first-priority liens on the real estate underlying 25 of Sears’ stores, and carries a 1.75% up-front fee.  While Sears carries considerable secured indebtedness, liens have generally been granted on inventory and receivables, not real estate, and the company reportedly maintains a substantial portfolio of unencumbered real estate.

The $400 million loan will provide Sears with liquidity to navigate through the holiday season, but may nevertheless indicate rougher waters ahead.  Most notably, the company previously funded operations, in part, through unsecured short-term commercial paper provided by ESL. ESL’s decision to move towards secured financing as opposed to unsecured financing could indicate deepening concern about repayment.  It is also a troubling sign to investors, as well as vendors, that the company would grant liens on its remaining unencumbered assets.

Nevertheless, in the short run, Sears still has numerous options, including approximately $240 million in availability under its asset-backed credit facility, $246 million in availability on its Canadian subsidiary’s asset-backed credit facility, and authority under its loan and note agreements to access the commercial paper and loan markets.

Sears’ also still has assets it can divest to generate cash, including its 51% stake in Sears Canada Inc., the operator of 432 retail locations in Canada, which has a current market value of approximately $765 million.  Another particularly valuable asset that Sears has yet to monetize is the Sears Auto Centers business.

In April of this year, Sears’ successfully spun off its outdoor apparel retailer Lands’ End, which resulted in a $500 million dividend to Sears, and the company has reportedly received $164 million from the sale of real estate this year.

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