Sears needs 10 times the cash Lampert lends

Eddie Lampert's $400 million loan to Hoffman Estates-based Sears Holdings Corp. is enough to keep the 128-year-old retailer going for three months. It'll need 10 times that capital if it hopes to see its 130th birthday.

After racking up more than $6 billion in losses over four years, the retailer will run out of cash in 2016 without at least $4 billion of new capital, according to Fitch Ratings. Credit-default swaps show traders are betting against the operator of its namesake chain and Kmart, pushing down its perceived creditworthiness at the fastest pace among major U.S. department stores, data compiled by Bloomberg show.

The company has been buffeted by declining consumer spending in department stores that are battling online retailers even as it cedes ground to rivals. Sears, which had negative free cash flow of $1.5 billion in the last year, had about seven months of cash left before Lampert offered his loan, Bloomberg data show.

“If you are burning more cash than you are bringing in, the situation is pretty dire,” Monica Aggarwal, an analyst at Fitch who authored the Sears report, said in a telephone interview. “They have to inject more liquidity.”

‘Many Assets'

Lampert's ESL Investments provided $200 million to Sears on Sept. 15 and will fund the remainder on Sept. 30, the Hoffman Estates, Illinois-based retailer said in a Sept. 15 regulatory filing. The secured loan has an interest rate of 5 percent and matures at the end of the year.

St. Joe Co. may contribute as much as $100 million to the loan, according to a filing yesterday. St. Joe, a real estate and timber company, is 24 percent-owned by Bruce Berkowitz's Fairholme Capital Management, which also has a 24 percent stake in Sears.

“We have many assets at our disposal to continue to fund our transformation,” Chris Brathwaite, a spokesman for Sears said in an e-mail. The company has “multiple financial resources available” to generate additional liquidity, he said.

Sears has been selling and spinning off assets to raise cash. It handed the Lands' End clothing business to shareholders earlier this year after divesting Sears Hometown & Outlet Stores Inc. in 2012.

Real estate sales in the U.S. and Canada, expense reductions, and “asset reconfiguration” have enabled the company to raise $4 billion in the last three years, Brathwaite said. Additional measures may take advantage of its “unencumbered” real estate portfolio, the 51 percent stake in Sears Canada and its auto center unit, he said.

Deteriorating Results

Those are options the company may have to take soon with its results likely to deteriorate, according to James Goldstein, an analyst at CreditSights Inc., who has an “underperform” rating on Sears debt.

“I don't see a turning point for them to make this a profitable business anytime soon,” he said in a telephone interview. “The only way to keep it going is to continue to carve out pieces of the business and monetize it. At some point the music stops, and that's when they get stuck.”

The retailer, which has been unprofitable in its last three fiscal years, lost more than $1 billion in the first half of its 2015 period, Bloomberg data show.

Factoring in capital expenditure of about $300 million and interest expense around $275 million, the company may burn $3 billion of cash in the two years through January 2016., according to Goldstein.

‘Additional Liquidity'

Sears had $829 million in cash and $240 million available under its asset-backed revolving credit line on Aug. 2, the end of its second quarter.

“The company has significant assets to raise additional liquidity,” Chris Kocinski, an analyst at asset manager Neuberger Berman Group LLC in Chicago, said in a telephone interview. “But ultimately the trend for the business will need to improve relative to recent performance.”

It must raise $4 billion to $6 billion to get through 2016, factoring in the cash burn, Fitch's Aggarwal said in the Sept. 16 report.

The retailer traces its roots to Minnesota railway agent Richard Sears buying a load of watches being returned to their maker in 1886, according to its website. He hired watchmaker Alvah Roebuck and then formed the mail-order company that became Sears Roebuck in 1893. The company issued its first general merchandise catalog in 1896, targeting farmers, and opened its first store almost 30 years later.

Kmart, Sears

Kmart acquired Sears Roebuck in 2005 in a $12.3 billion takeover that Lampert said would create a company with the geographic reach and scale to compete with Wal-Mart Stores Inc. Sales peaked at $53 billion in fiscal 2007, Bloomberg data show.

Lampert's firm owns about 48 percent of the outstanding stock, according to an Aug. 21 regulatory filing. Lampert also owns about $205 million of the company's $1.2 billion 6.625 percent notes coming due in October 2018. That's more than double the holdings in the notes at the same time a year ago.

The bonds traded at 90.5 cents on the dollar to yield 9.5 percent yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with an average 8.5 percent for bonds sold by U.S. department stores, Bloomberg data show.

The company has $3.9 billion in outstanding borrowings, with the next maturity of more than $10 million coming due in 2016.

‘Another Band-Aid'

The market share for department stores as a percentage of general merchandise, apparel and accessories, furniture and others has dropped to 13 percent this year from 27 percent in 2000, Bloomberg data show. Sears's share has declined relative to competitors, standing at 19 percent of department-store sales from 27 percent in 2006, the data show.

That decline is reflected in the derivatives market where price of contracts protecting against a default for five years on Sears's debt has increased 766 basis points to the equivalent of 1,863 basis points, according to CMA, which is owned by McGraw Hill Financial Inc. That means investors would have to pay about $1.86 million to protect $10 million of Sears debt.

The short-term loan is “another Band-Aid for a company that has been performing a surgery on itself for the last couple of years,” Steven Azarbad, co-founder of the New York-based hedge fund Maglan Capital, said in a telephone interview. “They have enough liquidity to go through the next year but beyond that it depends.”

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