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Sears Needs 10 Times Loan From Lampert: Corporate Finance

From
cash loan – Yahoo News Search Results:

Eddie Lampert’s $400 million loan
to Sears (SHLD) 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. (JOE) 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.

The retailer may need to sell additional debt, continue
asset divestitures or both to achieve Lampert’s goal of cutting
costs while investing in rebuilding its brands, Bloomberg
Intelligence analyst Noel Hebert wrote in a research note today.

Asset Divestitures

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.

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.

‘Additional Liquidity’

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.

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.

Richard Sears

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 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.

‘Another Band-Aid’

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

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 767 basis points to the equivalent
of 1,864 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.”

To contact the reporter on this story:
Sridhar Natarajan in New York at
snatarajan15@bloomberg.net

To contact the editors responsible for this story:
Shannon D. Harrington at
sharrington6@bloomberg.net
Mitchell Martin, Richard Bravo

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Sears Needs 10 Times Loan From Lampert: Corporate Finance

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