By Nathan Layne
Feb 26 (Reuters) – Weak sales and tight cash levels at Sears Holdings Corp have added urgency to Chief Executive Eddie Lampert’s plan to generate cash by spinning off stores into a trust.
The retailer announced on Thursday that it would go ahead with the plan to sell 200 to 300 stores to a real estate investment trust in May or June, raising at least $2 billion. It was the first time it put a figure or timetable on the move.
Some investors were disappointed that Sears didn’t announce a definitive launch for the REIT, floated as an idea by the company in November. They were also spooked by weak sales during the holiday season and its cash balance, which halved from a year earlier to $250 million, a level one analyst called “grossly inadequate” for a retailer of its size.
The stock slid 4.8 percent to $36.05.
“Everyone knew they were sort of running out and that’s why they are going to do the REIT. They need the money and that’s really the only other place they can raise a significant amount,” said Chad Brand, head of Seattle-based Peridot Capital Management, which holds Sears bonds.
Sears says it has ample financial resources to meet its obligations, with $1.2 billion in available liquidity including a revolving credit line. Outside of the REIT, it has indicated it could sell other assets, such as its auto centers business, and is cutting subleasing deals with retailers to raise cash.
Still, a lot is riding on the REIT. While most analysts say it should be able to pull it off, there are some complicating factors such as setting fair purchase and leasing terms and working around U.S. tax rules designed to prevent small groups from having voting control of a REIT. This is an issue because Sears is closely held by a few large investors, including Lampert and his hedge fund.
Sears has yet to disclose a cash flow statement, expected when it files its annual report. Brand estimates that it burned through about $1.2 billion in the fiscal year ended Jan. 31, including operating losses, pension costs, capex and interest.
At that rate, $2 billion from the REIT could tide Sears over for two years while it shrinks its store network further and pursues its “asset-light” strategy centered on growing its online business and a loyalty program called ShopYourWay.
There are other options besides the REIT. For an immediate infusion of cash it could draw down on the revolver. It could also unload assets or sell stock or loans in deals anchored by Lampert, as it did multiple times last year.
‘BURNING THE FURNITURE’
But conditions are tight. On Thursday it announced that it would repay half of one such financing, a $400 million loan to Lampert’s hedge fund, and extend the remaining $200 million until June 1 or until it can close on the REIT deal.
And while its earnings showed some improvement in the latest quarter, with a measure of profit excluding pension and other costs turning positive for the first time in two years, the outlook remains uncertain. On a net basis it booked its eleventh straight quarterly loss and sales fell sharply at Sears stores.
Evan Mann, a credit analyst at Gimme Credit, said the company would need to sell other assets if it can’t launch the REIT as planned this year.
“A billion dollars probably isn’t going to be enough for the year,” said Mann, referring to the available liquidity. “My assumption is they are going to keep burning the furniture to keep the store open.” (Reporting by Nathan Layne; Editing by Cynthia Osterman)
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With cash tight, Sears REIT deal takes on new importance
Flush with cash from the Bank of Japan (Tokyo Stock Exchange: 8301.T-JP)‘s (BOJ) stimulus effort, lenders won’t be put off from financing Japan Inc’s habit of paying too much for overseas acquisitions, even as a weaker yen makes those deals more expensive, analysts say.
“The banks need someone to lend to and M&A (merger and acquisition) financing is one of the few growth areas for them,” said Barclays (London Stock Exchange: BARC-GB) bank analyst Shinichi Tamura. As long as a company “looks creditworthy enough to pay back the loan, the banks will be happy to back the deal.”
Deal volumes sank to a twelve-year low in 2014, but a recent flurry of M&A deals suggests Japanese companies are ready to shop overseas again.
Last week, Japan Post made a $5.12 billion bid for Australia’s Toll Holdings (ASX: TOL-AU). On Monday, chemicals company Asahi Kasei (Tokyo Stock Exchange: 3407.T-JP) announced it would buy U.S.-based Polypore (NYSE: PPO)‘s energy storage business for $2.2 billion. On Tuesday, Hitachi (Tokyo Stock Exchange: 6501.T-JP) announced it would buy Finmeccanica (Milan Stock Exchange: FNC-IT)‘s transportation operations for 800 million euros ($909 million).
Whether the companies pay too much for overseas acquisitions is not the banks’ problem, according to Japan Macro Advisors chief economist Takuji Okubo: “That’s the company’s problem – the banks only care about the creditworthiness of the acquirer’s parent company.”
Desperate for borrowers
Japanese banks have faced a predicament for years: despite low interest rates, they can’t find enough borrowers.
The situation took a turn for the worse after the BOJ launched an unprecedented asset purchase program in April 2013. The program involves buying government bonds – the main source of yield income in the past for banks. Yields have trended ever lower but failed to stimulate any new demand for loans.
As a result, margins on bank loans in Japan continue to skim record lows. For example, the lending rate on domestic loans at Mitsubishi UFJ Financial Group (Tokyo Stock Exchange: 8306.T-JP), one of the country’s biggest banks, slipped to 1.10 percent in the last three months of 2014, from around 1.3 percent in early 2013, before the BOJ started its massive asset purchase program.
Read More Is Japan Post overpaying for Toll?
Flush with cash from the Bank of Japan’s stimulus effort, lenders will keep on financing Japan I …
That makes shorter M&A financing package loans that carry higher risk premiums and yields more attractive for banks, said Barclays’ Tamura. A typical loan will be rolled over into a three- to five-year syndicated loan, he said.
“The banks are desperate and are willing to take on the risks,” said Japan Macro Advisors’ Okubo.
But banks aren’t overly concerned about the risk factor.
“Private sector banks believe the loans carry implicit government guarantees” because public sector banks like Japan Bank for International Cooperation lead the M&A financing consortiums, Okubo said.
Race against time
Japanese companies may not need to worry about financing their overseas shopping sprees, but they should worry about the potential for further yen weakness, analysts said.
Prime Minister Shinzo Abe’s economic policies, dubbed Abenomics, and the BOJ’s quantitative easing efforts have weakened the yen by over 40 percent since Abe returned to power in December 2012. Many analysts expect the yen to weaken further.
“It makes sense for companies to be pre-emptive and do deals before the yen weakens anymore,” said BNP Paribas chief credit analyst Mana Nakazora.
Given strong cash balance sheets and a shrinking domestic market, that appears likely, according to PwC Corporate Finance director Gregory Bournet. He expects the number of outbound M&A deals to rise to 20 percent of all deals in fiscal 2015 from 10 percent in 2014.
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Cash rich lenders bankroll Japan Inc's shopping spree
cash loan – Yahoo News Search Results:
Walking past a row of vending machines and ATMs at the Kursky train station in Moscow, Sergei Amirkhanov stops in front of a bright orange cash machine. Instead of inserting his bank card, he scans his passport, poses for a photo and enters his mobile number. He receives a text message on his phone a few minutes later, telling him to return to the machine and withdraw the cash he needs.
This strange kind of ATM began popping up at railway stations and shopping malls around Moscow last year. It looks like a regular cash machine, but it’s designed to accept loan applications and dole out money on the spot.
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The loan ATM is a product of Oleg Boyko, a Russian billionaire who made his fortune running slot machine halls. When President Vladimir Putin banned gambling in 2009, Boyko moved the gambling business outside the country, but he continues to control financial firms and other companies in Russia. One of his investments is 4finance Holding and its affiliate, SMS Finance, which operates the micro-loan machines. Boyko, a paraplegic who helps support the Paralympic Games, has also dabbled in Hollywood. He’s an investor in Summer Crossing, a movie based on a Truman Capote novel that will be Scarlett Johansson’s directorial debut.
There are currently about 20 automated loan machines installed throughout Moscow. They allow customers to request as much as 15,000 rubles ($241) that must be paid back in 20 days or less. The interest rate is 2 percent a day, which works out to 730 percent on an annualized basis. That may seem insane, but some Russians have been willing to embrace the technology to make ends meet between paychecks.
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Amirkhanov, 37, took out a 3,000 ruble ($48) loan after he lost his construction job at a Moscow power station in February. He needed the money to hold him and his family over while he searches for work because his bank won’t let him borrow cash. “I have a banking card, but its balance is zero,” he says. “I am in a desperate situation.” Fallout from the conflict in Ukraine has taken a toll on the Russian economy, resulting in a freeze on some construction projects and an influx of Ukrainian refugees, who are creating more competition for jobs, he says. Amirkhanov was granted 15 days to pay back the loan, including 900 rubles in interest.
For many Russians, it’s the only way to borrow. After the value of the ruble began to plummet late last year, local banks took hits to their credit ratings and were no longer able to find lenders abroad. As a result, Russian banks have less cash to lend and are tightening client-scoring procedures to avoid bad loans. Leave it to a gambling magnate to have the stomach for risky consumer loans in this economy.
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Payday lenders similar to 4finance, such as Britain’s Wonga.com, are often characterized as vultures feeding on the vulnerable. Typical customers have poor credit or problems with employment or are uneducated about what financial options are available to them, according to Olga Naydenova, an analyst at BCS Financial Group in Moscow. “Their rates are way too high,” she says. “While regulation has been tightening for traditional banks, the micro-finance business has much softer requirements for capital adequacy.”
The absence of strict regulation allows micro-loan companies to provide options to people who would be passed over by traditional banks, according to Kieran Donnelly, chief executive officer of Boyko-backed 4finance. The company offers consumer loans in a dozen European countries, primarily through websites people access via computers or phones. More than 11 million loan applications have been submitted to 4finance, which lent €831 million ($944 million) last year. The company, which recently spun off the Russian SMS Finance unit to appease risk-averse investors, plans to hold an initial public offering as soon as 2016, Donnelly says. ”Our objectives are about profitability and return on investment,” he says. “A big part of what we are offering to people is convenience.”
Recognizing that many potential customers may not have access to the Internet or trust it with their banking information, SMS Finance began working on the ATM and installed the first ones in Moscow in May 2014. They contain software that matches a photo taken by the machine with one on a passport to verify customers’ identities, which help the company evaluate each applicant’s creditworthiness within 15 minutes. It’s still something of an experiment, but the company plans to test the ATMs in Poland and Spain next.
When a loan repayment is due, customers can settle it at a local bank, an electronics store, online, or by using a digital payment system such as Qiwi or Yandex.Money. If someone tries to skip out on paying, company representatives send e-mails, text messages, and phone calls. After two to three months of chasing a customer, they may involve debt collectors. About 10 percent of borrowers default on their loans, but the company is recovering 55 percent of overdue debt, says Donnelly. As Boyko, the investor and gaming billionaire, can probably attest, those are better odds than he’ll get at the casino.
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This Bizarre Russian ATM Wants to Lend You Money
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Don’t do it!
That’s the conventional wisdom about taking out a 401(k) loan. And as someone who took out one, left her job and found herself shelling out big bucks in taxes and penalties, I’m not about to argue with conventional wisdom.
However, people stretched financially thin may think otherwise. They may see their 401(k) account as a tempting source of cash. To help those of you thinking about dipping into your account, we want to take a moment to review what you need to know about these loans. I also contacted two Certified Financial Planners so you wouldn’t have to take my word for it.
I fully expected both planners to say 401(k) loans are nothing but bad news, and certainly, they both expressed extreme concern about people dipping into their retirement savings. But I was also surprised to hear that a 401(k) loan may make sense in some limited situations. Before we get to those, let’s start with the basics of 401(k) loans.
Basics of 401(k) loans
Named after a section of the tax code, traditional 401(k) plans allow you to put money aside, tax-free, for retirement. After a few years of regular contributions, these plans can carry a nice balance, which may start to look like a handy cash cow.
While there is no requirement that 401(k) plans allow loans, many do. Under IRS rules, those that do allow loans can let participants take out up to 50 percent of their vested account balance, or $50,000, whichever is less. Typically, these loans are paid back over a maximum of five years, although, in some cases, a longer payback period may be arranged. On occasion, the IRS issues special rules, such as after hurricanes Katrina, Rita and Wilma when those affected were allowed to take loans for their entire vested balance.
Loans from 401(k) accounts do charge an interest rate, but that money is paid back into the plan. This is one reason they may appeal to some workers. Rather than paying interest to a bank or other lender, the worker keeps the interest to pad their retirement account. In addition, repayments are made via a payroll deduction, which makes them convenient, another bonus for some workers.
Why they aren’t such a hot idea
Despite being an apparent source of easy cash, some finance experts say you should be keeping your hands off your 401(k).
“Your 401(k) is not a savings account,” says Mark Vandevelde, a CFP and wealth partner with Hefty Wealth Partners in Auburn, Ind. “It is money that should be set aside for long-term goals and never to be touched, in my humble opinion.”
As Vandevelde sees it, there are three problems with 401(k) loans:
- Lost investment gains that can reduce your fund balance at retirement.
- The risk of defaulting on the loan, which could result in taxes and a penalty.
- The chance you may reduce your 401(k) contributions to afford the loan repayment amount, which again could affect your fund balance at retirement.
“It’s not free money,” Vandevelde says. “You have to pay it back with regular payroll deductions. Many people end up reducing their actual 401(k) contributions to compensate for the amount they are having to pay back and, therefore, they actually aren’t saving as much.”
On its website, Principal Financial Group has an example of how this may play out. A 35-year-old who takes out a $5,000 loan and pays it back over five years may find himself with $52,000 less at age 65. The calculation assumes a $150 per-paycheck contribution that is decreased by $44 to accommodate the loan repayment.
Keith Klein, a CFP and owner of Turning Pointe Wealth Management in Phoenix, agrees with Vandevelde that a 401(k) loan shouldn’t be your first choice for cash.
“The key to remember is when you take money out, it has to be paid back in five years,” Klein says. “If you default, that money will be considered income, and you’ll have to pay taxes plus a 10 percent penalty.”
Plus, a lot can happen in five years, and if you find yourself taking a new job opportunity, you’d better be ready to pay up.
“A lot of people don’t realize what happens when you leave [or] get fired from your job and you have an outstanding 401(k) loan,” Vandevelde says. “It becomes immediately due and has to be paid in full. If you cannot pay it back, the remaining balance is considered a distribution and is subject to tax and a 10 percent penalty if [you’re] under age 59½.”
When a 401(k) loan might make sense
Despite the financial perils associated with a 401(k) loan, Klein says there may be times when it makes sense to take one out.
“Now, I’m not recommending you take loans out,” he says, “but there are circumstances when life doesn’t go perfectly.”
For example, an older worker who is losing a job may find taking out a loan and letting it default could be a better option than paying their bills with the credit card until they find other employment or are old enough to claim Social Security. While the money will become taxable income, the 10 percent penalty no longer applies once an individual turns 59½.
Divorce or disability could be other scenarios in which a 401(k) loan may be a better way to bridge an income gap in an emergency situation. Still, Klein says it’s not an ideal option. “Having a [cash] reserve is always the best answer,” he notes.
Both Vandevelde and Klein say that, unfortunately, far too many people rush into a 401(k) loan, or they use them for purchases such as vacations, cars or even big screen TVs. For those sorts of purchases, both financial planners agree a 401(k) is not the right source of money.
So going back to the question in the headline: Is getting a 401(k) loan a good idea? Given the drawbacks listed above, it’s probably not ever a good idea, but in some unique situations, it may be the best of your not-so-great options.
Of course, rather than waiting to find yourself in an emergency with limited options, a better course of action would be to get out of debt and bulk up your savings account now. If you’re not sure how, subscribe to the Money Talks News newsletter to get the best personal finance tips and advice delivered straight to your inbox each day.
For more tips on saving for retirement, watch the video below:
Watch the video of ‘Is Getting a 401(k) Loan a Good Idea?’ on MoneyTalksNews.com.
This article was originally published on MoneyTalksNews.com as ‘Is Getting a 401(k) Loan a Good Idea?’.
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Is Getting a 401(k) Loan a Good Idea?
Stewart Information Services Corp. (STC) (“Stewart”), a leading provider of real estate services, including global residential and commercial title insurance, escrow and settlement services, lender services, underwriting, specialty insurance and other solutions that facilitate successful real estate transactions, today announced that its Board of Directors has approved an increase in the Company’s cash dividend payable to common shareholders from $0.10 per share annually to $1.00 per share to be paid quarterly at a rate of $0.25 per share beginning in the second quarter of this year. The Company’s existing share repurchase authorization will remain in effect and be used opportunistically based on various factors such as the Company’s stock price, operational performance and other relevant criteria.
“Today’s dividend increase highlights the solid progress we have made toward transforming Stewart and reflects our confidence in the Company’s ability to deliver solid cash flow in 2015 and beyond,” said Matthew W. Morris, Chief Executive Officer. “We continue to engage our shareholders regarding our capital return strategy. Given the continued progress in our business, we are pleased to be in a position to advance a competitive and sustainable dividend policy alongside our share repurchase program. Going forward, we will remain committed to returning meaningful amounts of capital to shareholders on a regular basis while also maintaining our ratings and a capital base that supports the growth in our business.”
The continuation of the quarterly cash dividend is subject to certain factors, including, among others, the ability to obtain excess capital from Stewart’s regulated insurance subsidiary, the performance of the Company’s business, the Company’s ratings and the capital surplus position of the Company.
Stewart Information Services Corp. (NYSE:STC) is a customer-focused, global title insurance and real estate services company offering products and services through our direct operations, network of approved agencies and other companies within the Stewart family. Stewart provides these services to homebuyers and sellers; residential and commercial real estate professionals; mortgage lenders and servicers; title agencies and real estate attorneys; home builders; and United States and county governments. Stewart also provides loan origination and servicing support; loan review services; loss mitigation; REO asset management; collateral valuations; due diligence for capital markets; home and personal insurance services; tax-deferred exchanges; and technology to streamline the real estate process. Stewart offers personalized service, industry expertise and customized solutions for virtually any type of real estate transaction, and is the preferred real estate services provider. More information can be found at http://www.stewart.com/news, subscribe to the Stewart blog at http://blog.stewart.com or follow Stewart on Twitter @stewarttitleco.
Certain statements in this news release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “will,” “foresee” or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the tenuous economic conditions; adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses or the need to strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the impact of vetting our agency operations for quality and profitability; changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of pending litigation; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expense savings from our cost management program; our ability to successfully integrate acquired businesses; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; and our ability to respond to the actions of our competitors. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including the Form 10-K, our quarterly reports on Form 10-Q, and our Current Reports on Form 8-K. We expressly disclaim any obligation to update any forward-looking statements contained in this news release to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.
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Stewart Information Services to Increase Annual Cash Dividend to $1.00
NEW YORK–(BUSINESS WIRE)–
Fitch Ratings has affirmed the PHEAA Student Loan Trust 2014-1 senior note at ‘AAAsf’ and subordinate note at ‘Asf’. The Rating Outlook remains Stable for both classes.
KEY RATING DRIVERS
High Collateral Quality: The trust collateral consists of 100% Federal Family Education Loan Program (FFELP) loans, including approximately 12% rehabilitated (rehab) FFELP loans. The credit quality of the trust collateral is high, in Fitch’s opinion, based on the guarantees provided by the transaction’s eligible guarantors and reinsurance provided by the U.S. Department of Education (ED) for at least 97% of principal and accrued interest. The current U.S. sovereign rating is ‘AAA’ with a Stable Outlook.
Sufficient Credit Enhancement (CE): While both the senior and subordinate notes will benefit from overcollateralization (OC) and future excess spread, the senior notes also benefit from subordination provided by the class B note. As of December 2014, total parity is 100.93% (0.92% CE) and senior parity is 103.96% (3.81% CE). Cash will be released from the trust given that the specified OC amount (the greater of 1.54% of the adjusted pool balance or $5.8 million) is maintained.
Adequate Liquidity Support: Liquidity support for note is provided by a reserve account. The reserve is sized equal to the greater of 0.25% of pool balance and $837,743.
Acceptable Servicing Capabilities: Pennsylvania Higher Education Assistance Agency as servicer, will be responsible for servicing the portfolio. Fitch has reviewed the servicing operations of Pennsylvania Higher Education Assistance Agency and believes it to be acceptable servicer of FFELP student loans.
Since FFELP student loan ABS rely on the U.S. government to reimburse defaults, ‘AAAsf’ FFELP ABS ratings will likely move in tandem with the ‘AAA’ U.S. sovereign rating. Aside from the U.S. sovereign rating, defaults and basis risk account for the majority of the risk embedded in FFELP student loan transactions. Additional defaults and basis shock beyond Fitch’s published stresses could result in future downgrades. Likewise, a buildup of credit enhancement driven by positive excess spread given favorable basis factor conditions could lead to future upgrades.
A comparison of the transaction’s representations, warranties, and enforcement mechanisms (RW&Es) to those of typical RW&Es for FFELP asset-backed securities is available in the presale appendix. This presale appendix and Fitch’s special report on ‘Representations, Warranties, and Enforcement Mechanisms on Global Structured Finance Transactions,’ may be accessed via the links provided below.
Fitch has taken the following rating actions:
PHEAA Student Loan Trust 2014-1:
–Class A affirmed at ‘AAAsf’; Outlook Stable;
–Class B affirmed at ‘Asf’; Outlook Stable.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–’Global Structured Finance Rating Criteria’ (May 20, 2014);
–’Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria’ (June 23, 2014);
–’PHEAA Student Loan Trust 2014-1 — Appendix’ (Feb. 24, 2014);
–’Representations, Warranties, and Enforcement Mechanisms in Global Structured Finance Transactions’ (Oct. 31, 2014).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Rating U.S. Federal Family Education Loan Program Student Loan ABS Criteria
PHEAA Student Loan Trust 2014-1 — Appendix
Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions
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Fitch Affirms PHEAA Student Loan Trust 2014-1