Ratings agency Moody’s Investors Service believes Sears Holdings Corp. faces challenges in mitigating its operating losses, and questions the viability of the Kmart business.

Moody’s downgraded Sears’s speculative grade liquidity rating to “SGL-3” from “SGL-2,” although all other ratings including the “Caa1” corporate family rating remained unaffected.

Christina Boni, vice president and senior analyst in the corporate finance group, said the latest downgrade “reflects our view that Sears will continue to rely on external financing and the monetization of its alternative assets to fund its operating losses.” She added that the rating also reflects the “risks associated with relying on these sources and continued shareholder support to finance its negative operating cash flow, which is estimated by Moody’s to be approximately $1.5 billion this year.”

The rationale for the downgrade also recognizes the uncertainty that the firm’s “operating strategies will stem its continued losses and be sufficient for its cash burn to approach break-even levels.” The Moody’s report noted that although the company has a sizable asset base, its “debts are significant with approximately $3.5 billion of funded debt, as well as an unfunded pension and post-retirement obligation of $2.1 billion.”

Further, Moody’s said the downgrade also reflects “our view on the uncertainty of the viability of the Kmart franchise in particular, given its meaningful market share erosion.”

The ratings agency believes that the company will face challenges in reducing its high cash burn even with its ability to monetize additional real estate assets as needed to maintain liquidity. The agency said Sears’ high cash needs include minimum pension contributions of $596 million in 2016 and 2017.

While Moody’s said an upgrade in the near-term is “unlikely,” given the negative outlook, it also said a further downgrade is possible “if the unencumbered asset base continues to erode while operating losses remained significant.”

Sears operated 1,592 stores under the Sears and Kmart nameplates as of July 30. It said that about 49 percent of Sears’ common stock is owned by entities affiliated with Sears chairman and chief executive officer Edward S. Lampert.

A spokesman for Sears said: “We don’t think it is appropriate to comment on the specifics in the Moody’s release, but as we have stated publicly we continue to focus on the funding of our transformation while meeting all of our financial obligations, using the levers available to us through our portfolio of assets and businesses.”

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