Sears getting twelve months breathing room

Eddie Lampert's latest efforts to raise funding for Sears Holdings Corp. is raising optimism that the 128-year-old retailer will have as many as 12 additional months to turn around its sagging fortunes.

A rally in the company's bonds pushed yields down yesterday to levels not seen since May after it announced a plan to offer its shareholders $625 million of notes plus warrants to buy additional shares. Lampert, the chairman, chief executive officer and largest shareholder, intends to participate, taking up almost half the offer, according to a company statement.

While Lampert's support indicates he's confident in the retailer's future, Sears still must contend with widening losses that capital infusions don't directly address. Lampert has sought to boost profits from online sales and loyalty programs, an effort that hasn't been fruitful because competitors have beaten him to the punch, according to Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles.

"The deal would help them for the year, but they will have to do something again next year," according to Monica Aggarwal, an analyst at Fitch Ratings. "They need a total of $2.7 billion to cover $2 billion in cash burn this year and up to $700 million in working capital alone."

Bonds Rise

Sears's $1.23 billion of 6.625 percent bonds due in October 2018 rose 2.75 cents on the dollar to 93.5 cents yesterday. That reduced their yield to 8.59 percent, the lowest since May 13 and down from 9.47 percent at the end of last week. The yield falls between what investors are demanding for securities due in three to five years that are rated between B and B-, according to data compiled by Bloomberg. Those bonds are rated Caa1 by Moody's Investors Service and B- by Standard & Poor's.

Shares of the Hoffman Estates, Illinois-based retailer rose 23 percent yesterday.

The retailer has recorded 30 straight quarters of sales declines as customers move online, Bloomberg data show. Lampert has been investing in membership programs for five years to transfer "our business from a traditional retail chain to a member-centric integrated retailer", Chris Brathwaite, a spokesman at Sears, said in an e-mailed response to Bloomberg.

The operator of Kmart and its namesake Sears stores, which Fitch last month calculated would need $4 billion of capital to avoid running out of cash in 2016, will raise as much as $2.07 billion this year if rights offerings are fully subscribed, the company said in a blog post.

The company this month offered stockholders as much as 40 million shares in its Sears Canada unit at $9.50 a share, or $380 million. In addition, Lampert last month arranged $400 million of short-term loans and the company secured $500 million in a payout from the spinoff of Land's End LLC earlier in the year.

Sears will also raise funds by leasing space to Primark Stores Ltd., the Reading, England-based budget-clothing retailer that's expanding in the U.S. Primark will set up shop in seven Sears stores in the Northeast, according to a second statement yesterday.

The rights issue announced yesterday might let shareholders who buy the notes retain their interests in the company in case Sears goes through a restructuring.

"It would enable Lampert to reassert control on the assets and eventually the equity, similar to what happened in the Kmart filing," said Matt McGinley, managing director at New York- based International Strategy & Investment Group, which has a sell rating on Sears's stock. "They're a much bigger creditor, assuming the rights offering is fully subscribed, than they were before."

The company's next significant debt maturity is a revolving loan with about $1.4 billion currently outstanding that comes due in 2016, Bloomberg data show.

"This deal bolsters the balance sheet by alleviating the immediate liquidity issues," said Steven Azarbad, co-founder of the New York-based hedge fund Maglan Capital. "If you are a vendor, you will feel much more comfortable in terms of the liquidity point of view. It doesn't solve all the liquidity problems, but it buys the company six to nine months."