Sears turnaround seen as failing by traders
Billionaire Eddie Lampert's quest to revive Sears Holdings Corp. is looking dubious to credit-swaps traders.
It now costs more to insure against a Sears default for a year than for five years, a dynamic that indicates traders anticipate a credit event such as a default in the near term. The relationship was reversed as recently as last month, according to prices compiled by CMA in the privately negotiated market for credit swaps.
The 129-year-old company, which has lost $7 billion over the past four years, is trying to avoid the fate of RadioShack Corp., another once-iconic retailer that filed for bankruptcy protection this month. Sears has divested assets and received cash infusions from Lampert, one of its largest shareholders. In November, the Hoffman Estates-based company said it was considering the sale and leaseback of as many as 300 stores as part of its turnaround effort.
“It's becoming increasing clear that this year is going to be the tipping point for liquidity,” James Goldstein, an analyst at debt-research firm CreditSights Inc., said in a telephone interview. “Their underlying retail model remains broken, and if it continues like this, it sucks the lifeblood out of whatever remaining value there is in its real estate.”
The price of contracts guarding against a default within a year climbed to the equivalent of 1,434 basis points Wednesday, according to CMA, which is owned by McGraw Hill Financial Inc. That compares with 1,247 basis points on five-year protection, the data provider's prices show. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Cash Question
Chris Brathwaite, a spokesman for Sears, declined to comment.
The contracts, which investors use to hedge against losses on corporate debt or to speculate on a company's financial stability, decline in price as investor confidence improves and rise as it deteriorates. The cost to protect debt with swaps typically increases the longer the term of the contract as investors pay more to guard against unexpected risks over an extended time period.
“Because Sears Holdings owns a lot of their real estate, it provides them with more cushion,” Poonam Goyal, an analyst at Bloomberg Intelligence, said in a telephone interview. “Without the real estate ownership, it would be very difficult for Sears to remain in operation given the decline in revenue.”
In the second half of last year, Sears announced a $625 million rights offering in which Lampert participated, following a $400 million loan from his firm.
“The big question is if he can pull off something on the real estate side and what he does with the cash that he brings off that,” Goldstein of CreditSights said.
Sears has seen sales slump and has ceded market share to rivals and online retailers amid declining consumer spending in department stores.
“We remain highly focused on restoring our company to profitability,” Lampert said in a December earnings call with investors and analysts. “We have a number of different levers at our disposal.”