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With cash tight, Sears REIT deal takes on new importance

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.


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)

FinanceInvestment & Company InformationEddie Lampertreal estate investment trust […]

Sears Shares Spike As Company Seeks To Raise Cash Through A REIT


That Sears is desperate for cash is hardly news: the struggling retailer took out a $1 billion loan in October of last year and, less than a year later, hit up CEO Eddie Lampert for another $400 million. Now, the company has a new plan for cash generation: it is considering the sale of as many as 300 of its stores to a real estate investment trust (REIT) and then leasing back those stores. Even though the retailer did not say how much money this maneuver could generate, investors are cheering the idea, sending Sears stock for a more-than 30% gain in early Friday trading.

In a document filed with the SEC Friday morning, Sears provided a financial and performance update, saying that it projects third quarter adjusted EBITDA to fall between a loss of $275 million and $325 million, a loss consistent with the $310 million loss reported during the third quarter of 2013. The retailer also said that in the 13-week period ending on November 1, company-wide same store sales declined 0.1%, with Kmart’s 0.5% growth in comparable store sales offset by an 0.7% decline in Sears domestic comparable store sales.

Sears also said that as of November 1, it had approximately $330 million in total cash and $234 million available under its credit facility; its debt, meanwhile, was $6.3 billion but the company expects its year-end balance to be “materially lower” than the $5.9 billion in debt it had at year-end 2013.

In an effort to decrease that balance and bolster its financial standing, Sears said that it is evaluating the monetization of 200 to 300 of its stores through a sale-leaseback transaction. Specifically, such a maneuver would involve selling these stores to a newly-formed REIT but then leasing them back (and operating them) under one or more master leases. Sears did not detail how much it stands to gain from such a transaction, saying only that “the company would realize substantial proceeds from such sale, which would further enhance its liquidity.”

Sears went on to say that if it does pursue a sale-leaseback transaction — and there can be no guarantee that it will — it would distribute to its shareholders the rights to purchase shares of common stock or other equity interests of the REIT.

Even though this move is far from set and the precise financial gain is as yet unknown, investors cheered the announcement, sending Sears shares for a more-than 20% gain in Friday’s pre-market trading session. The stock improved upon this gain in the early hours of Friday’s regular trading session: it opened nearly 25% higher than its Thursday close and is currently trading to a 33% gain. Year-to-date, the stock is down 5.3%.


Sears Needs 10 Times Loan From Lampert: Corporate Finance

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

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

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Sears Borrowing $400 Million From Affiliates Of Eddie Lampert's Hedge Fund


Less than one year after Sears Holdings borrowed a $1 billion loan, the struggling retailer is in need of yet another cash infusion. And to get the nearly half-billion dollars it needs, the company has turned to its CEO and wannabe-savior, Eddie Lampert.

In an 8-K filed with the SEC late Monday, Sears revealed that it has entered into a $400 million short-term loan with affiliates of ESL Investments, Lampert’s hedge fund. The first $200 million was funded at the close of business on September 15, and the remaining $200 million will be funded on September 30. The loan will have a base rate of 5% with an upfront fee of 1.75% of $400 million and will mature on December 31, 2014 (though if Sears does not default, the maturity date can be extended another two months).

Sears did not go into the details of how it plans to use these funds, saying only that it expects to use the loan’s proceeds for “general corporate purposes.”

The cash infusion is the latest in a series of Lampert-headed efforts to help the struggling retailer: he combined Sears and Kmart in 2005, made his hedge fund the retailer’s biggest shareholder and has pushed to spin off assets like Sears Auto Center and Lands’ End. However, in December of last year, ESL was forced to cut its stake in Sears in order to meet demands from investors looking to get out of the hedge fund.

For all of Lampert’s efforts, Sears has been bleeding cash: in August, the company revealed that it recorded a $573 million net loss during the second quarter, more than double the $194 million net loss it recorded during the second quarter of 2013. Lampert called the half-billion dollar loss “unacceptable,” and said that the company is taking steps to improve the business and reduce its costs.

Sears shares plummeted on the news and are down more than 6% in early Tuesday trading. Year-to-date, the stock has lost 28% of its value.