kmart sears holdings corp. edward lampert

Moody’s Investors Service cut Sears Holdings Corp.’s corporate family credit rating to “Caa2” from “Caa1” and questioned the viability of its Kmart business.

Under Moody’s scale, ratings in the “Caa” category are “judged to be speculative of poor standing and are subject to very high credit risk.”

“The downgrade reflects the accelerating negative sales performance of Sears’ business with comparable sales falling 12 percent to 13 percent for holiday period compared to the prior year,” the debt watchdog said.

Christina Boni, Moody’s debt analyst, added: “Although Sears has been able to fund its continued cash shortfalls through planned asset monetization, and additional financings, a meaningful business turnaround in fiscal 2017 is critical given the continued reduction of its asset base. We expect operating cash flow to approach a disappointing loss of $1.5 billion for fiscal 2016.”

The downgrade called into question the ailing Kmart business. Moody’s said the ratings “reflect our view on the uncertainty of the viability of the Kmart franchise in particular given its meaningful market share erosion. The company’s announced closure of 150 stores — 108 Kmart stores and 42 Sears — stores is an effort to reduce store space and increase productivity.”

Chief executive officer Edward S. Lampert created the modern version of the company when he pulled Kmart out of bankruptcy and combined it with Sears in 2005.

While the retailer has been taking steps to boost its cash, Moody’s noted that it’s not certain the firm’s “operational strategies” will stop the cash burn.

A company spokesman said, “We believe that we have sufficient resources to support our operations and meet all of our financial obligations.”

Sears’ credit rating, which has a stable outlook, took into account its recent moves to boost liquidity by $1 billion through a real estate loan and a deal to sell Craftsman.

“Although Sears can continue to improve its financial position through further sales of other brands or additional stores, fewer assets will be available to mitigate future shortfalls in operating cash,” Moody’s noted.

Sears has about $4.3 billion in funded debt as well as pension obligations of about $2 billion.

On the other side of the ledger, the company has about 211 unencumbered Sears and Kmart properties, prior to the planned asset sales, which Moody’s said were worth more than $2.5 billion. It also owns the Kenmore and DieHard brands.

“Nonetheless, the company must improve its business performance dramatically to have a meaningful impact on its high cash burn,” Moody’s said.