Sears doom-and-gloomers approach the end of their long wait.
Sears Holding Corp., which owns the Sears and Kmart stores and is run by hedge-fund manager Eddie Lampert, who is also its largest shareholder, pulled off another little trick when it announced today that it had lined up $200 million “to fund its operations,” but not cash, which is what Sears needs more than anything, given the rate at which it is burning it, but a Secured Standby Letter of Credit, which may be expanded to $500 million, “with the consent of the lenders.”
This announcement gives some clues that after many years of disappointment, Sears doom-and-gloomers might finally approach the end of their long wait:
- Sears is scrounging up this financing right after the holiday selling season when retailers should be swimming in cash and profits. It’s their best time of year. But even that wasn’t enough for Sears.
- The letter of credit is not from a bank, but from JPP, LLC and JPP II, LLC, which are affiliates of ESL Investments, which is Lambert’s hedge fund. Citibank serves only as “administrative agent and issuing bank.” In other words, no one outside of Lambert is still willing to lend to Sears.
- The letter of credit is designed to soothe the nerves of Sears’ suppliers, which, fretting about not getting paid, might cut Sears off.
That suppliers are getting antsy has been an ongoing problem. But on December 16, according to Debtwire, “three sources familiar with the matter” said that suppliers were “requesting cash in advance before they agree to ship or are opting instead to avoid shipments altogether.” This “would mark a new chapter in the company’s ongoing descent, according to the sources.”
On December 8, Sears had reported another mega-loss, $748 million for the quarter – or $6.99 a share, the worst in over four years of bad losses – adding to its pile to cumulative losses, which after eight years of additions, has now reached $9.4 billion. Revenues plunged 12.5% year over year.
At the time, Sears said it had $258 million in cash as of October 29 and $174 million available to borrow via its revolving credit line. Not much, given the cash-burn rate.
Nevertheless, and with bitter irony, Sears assured its shareholders in the press release at the time that it was “fully committed to restoring profitability,” upon which its shares jumped 4.5% to $12.66, only to plunge 34% in the weeks since, sucker-punching, as Sears invariably does, those hardly souls that keep buying these shares on a wing and a prayer.
To keep afloat over these money-losing cash-burning years, Sears has sold some of its brands, including Lands’ End and Hometown & Outlet Stores. It has also sold off big parts of its real estate holdings, including the Sears building in Oakland, which Uber bought for its new headquarters.
In the third quarter alone, Sears Holding also terminated the leases of 17 store properties owned by Seritage Growth Properties, a publicly traded REIT, which Sears Holding had formed on July 8, 2015 (more on that in a moment). The rights offering included in the deal helped fund Seritage’s $2.7 billion sale-leaseback acquisition from Sears Holding of 235 Sears and Kmart stores along with 31 properties where Sears was part-owner.
It’s trying to offload other brands, including Kenmore, Craftsman, and DieHard, along with its Sears Home Services business. Those efforts have not been fruitful so far, and the statement said that “there can be no assurance” these transactions will ever happen.
Alas, to get through 2017, Sears will have to raise about $1.5 billion, opined Moody’s analyst Christina Boni in early December.
But a big over-indebted, money-losing, cash-burning brick-and-mortar retailer cannot shrink itself to health. It just enters a spiral of steeper revenue declines and bigger losses and more cash burn, all the while adding to its ever increasing mountain of debt, to be serviced by ever shrinking revenues and ever greater losses. The only uncertainty: when will it run out of wiggle room?
On September 28, Fitch Ratings figured Sears among 30 brick-and-mortar retailers that had a good chance of filing for bankruptcy protection within a year or two. Sears has to repay about $2.8 billion in junk bonds and term loans that are coming due in the next few years. Hence, there’s a “significant default risk.”
Monica Aggarwal, managing director of Fitch’s retail team, said that “Sears’ restructuring risk is high over the next twelve months, as our ‘CC’ rating would suggest.”
That means “most likely a bankruptcy, or a Chapter 11 filing,” one of the report’s authors, Sharon Bonelli, told TheStreet.
When a retailer like that files for bankruptcy, stockholders get shafted and most likely end up with nothing. Holders of unsecured debt “fare poorly,” according to Fitch’s review of past retailer bankruptcies. Recoveries on second-lien debt “varied.” But first-lien lenders made “full recoveries on at least one bank loan or secured bond issue.”
So who owns Sears’ first-lien debt? Lambert and his hedge fund? And when will that bankruptcy finally happen?
Probably not before July 8, 2017, the date of the above-mentioned sale-leaseback deals to Seritage Growth, according to Debtwire:
[S]ome investors and analysts prognosticate that management is incentivized to at least keep the company out of bankruptcy through July 2017, since that would mark the two-year anniversary of the landmark $2.7 billion sale lease-back and rights offering transactions completed on 8 July, one of the sources familiar noted.
The bankruptcy code provides a two-year look-back period for the avoidance of fraudulent conveyance with state law often providing a greater look-back, one of the sources said.
Fired up by the news of the $200-million Secured Standby Letter of Credit earlier today, Sears’ shares soared nearly 9% $8.90. In the past, each time an announcement like this caused shares to jump, which they always seem to do, the hapless buyers quickly got sucker punched.
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