Yesterday, Sears sold off on news that CIT decided to halt loans to Sears' suppliers. Fitch released a note on this yesterday, see it below. As a result of the CIT news (or something else), Sears Holdings Corp. and Sears Roebuck Acceptance Corp's 5Y credit default swaps spiked. I was wondering if Lampert was buying Sears CDS back in December to hedge his position without having to report it in a filing. Why doesn't he own any puts!? The CDS rate is the cost to insure $5 million of Sears bonds per year, which can be a naked position. I was able to get a snapshot of SRAC's CDS chart at CMA (see below), and Zero Hedge posted both charts on Twitter. Sears' cash bonds were active as well. Sears Holdings Corp's 6.625% fixed note maturing on 10/15/2018 (SHLD.JE) closed at 78.375 today, yielding 11.287%. It was interesting to see the stock up 3% today with the CDS spike.
|Sears Roebuck Acceptance Corp 5Y CDS (Source: CMA)|
"Sears' Liquidity Under More Pressure After CIT Pullback
Fitch Ratings regards CIT Group's decision to discontinue vendor financing for Sears Holdings as an additional liquidity concern for the retailer in 2012, potentially boosting working capital requirements. Based on a conversation with the company, Sears has indicated that other factoring firms continue to approve orders.
As noted in the Dec. 29 downgrade of Sears' issuer default rating (IDR) to 'CCC', our current liquidity estimates and external financing expectations for 2012 assume no material changes in vendor credit terms. The CIT decision, while affecting less than 5% of Sears' outstanding inventory (5% would equate to $400 million-$450 million based on Fitch's 2012 inventory forecasts), reduces the company's margin of safety with respect to cash needs as the company looks to avoid further erosion of EBITDA with comp sales under significant pressure.
Availability on Sears' U.S. and Canadian revolving credit facilities totaled approximately $2.9 billion at Dec. 23, 2011. The company's liquidity position may weaken somewhat by the end of the fiscal year on Jan. 31 as the company funds spring inventories.
Fitch estimates Sears would need to generate EBITDA of $1.2 billion to $1.3 billion annually in 2012 and 2013 to service cash interest expense ($260 million-$280 million), capex ($400 million), and contribution to pension plans ($300 million) and debt maturities. With less than $400 million in EBITDA expected for 2011 and the potential for EBITDA to turn negative in 2012, operations will have to be funded with increased borrowings on its revolvers, with additional external financing required in 2013, if not earlier.
While Sears could potentially add $1.75 billion of secured borrowings under existing covenants, further evidence of reductions in vendor financing or significant changes in credit terms could affect access to new sources of secured debt.
Any further negative rating action on Sears would depend on evidence of material negative changes in credit availability and a significant weakening of the company's liquidity outlook."
I wrote a more in-depth post on Sears Holdings on January 2 after the stock lost 27% in a week. The company announced on 12/27/2011 that it was planning to close 100-120 marginal Kmart and Sears stores. Here's the list if interested. SHLD is trying to hold on to the 2008 low on the chart. So, what will Lampert do next with this company. Here are articles to read.
Sears Chairman Buys Shares, but His Reason Is Unclear (NYT Dealbook)
Tears for Sears: American icon in trouble (CNN Money)
Sears Swaps (and Whirlpool Swaps) Soar to Record as CIT Said to Halt Vendor Loans (Bloomberg)
Investors Journey Through a Vale of Sears (WSJ)
Ron Boire Takes on the Ultimate Turnaround at Sears (FINS)
Sears Seeks to Calm Nerves (WSJ)
Lender's decision puts more heat on Sears Holdings (Chicago Tribune)
Sears: trouble in store (Globe and Mail)
Sears CEO Says Retail Turnaround Means Melding Tech With Store Upgrades (Bloomberg)