In regard to Sears Holdings Corp.’s intention to get a new, first-lien secured loan facility — of up to $750 million, the retailer said — the effort will “not improve the company’s liquidity position versus 2015 or change its credit story,” according to a report from Fitch Ratings.
Fitch analysts said the $750 million term loan would, however, “help to offset the April 2016 reduction of the credit facility during the third-quarter peak borrowing season.” The ratings firm also said Sears has other “potential sources of liquidity” that could be turned into cash.
“Sears still owns and could monetize 268 unencumbered Kmart discount and Sears full-line mall stores (this excludes 125 Sears full-line mall stores in a bankruptcy-remote vehicle and 26 specialty stores),” Fitch analysts said in their report. “If the unencumbered real estate was valued at a similar price per square foot as the 235 properties sold under the Seritage transaction, Fitch estimates Sears could generate an additional $2.6 billion in proceeds.”
But is that still enough cash?
Fitch said the retailer’s credit facility size “is $3.275 billion until April 2016, at which point $1.304 billion will expire and $1.971 billion will extend until 2020.”
The analysts said proceeds from the term loan will “have to be used to reduce borrowings under its $3.275 billion asset-based revolving credit facility as the company’s ability to issue incremental debt secured by receivables and inventory — which governs the borrowing base that determines the borrowing capacity on its existing credit facility, after netting out the first-lien term loan and second-lien secured notes — has been limited given the significant reduction in working capital over the past few years.”
All of which means the company’s working capital has been reduced to a point that strains the retailer’s loan facilities.
Even monetizing the real estate could be problematic. Fitch said the remaining portfolio — after selling the aforementioned 268 units — could be of “lower value if the stores are in smaller markets or declining malls, and there could be restrictions on the sale of some of these properties based on mall operating covenants.”
“There could also be value in below-market leases, but the potential proceeds are difficult to estimate,” Fitch said. “The company could also separate its Sears Auto Center business.”
Meanwhile, there’s still trouble with the bottom line. Fitch said Sears had reported pretax earnings for 2015 of a loss of $837 million “on negative comparable-store sales of 9.2 percent.”
“Fitch expects comps to be in the negative midsingle-digit range in 2016 and 2017, with topline declining potentially in the high single-digit range as Sears continues to close stores,” the analysts said adding that this year, the pretax loss is expected “to be in the negative $800 million to $1 billion range, even assuming cost reductions as targeted of $550 million to $650 million.”