Fitch Ratings has affirmed the Long-term Issuer Default Ratings on Sears Holdings Corp., but noted the company’s significant cash burn rate.
The rating was kept at “CC,” with the expectation that earnings before interest, taxes, depreciation and amortization remaining “materially negative.” The ratings agency also noted that the cash burn rate for 2016 is expected at $1.6 billion to $1.8 billion. Of that amount, the bulk at around $800 million is for the company’s interest expense, capital expenditures and pension plan contributions. The agency also said Sears needs to fund seasonal working capital needs, with inventory expected to range from $5.4 billion to $5.5 billion at the holiday peak. That suggests “$500 million to $650 million is required, assuming a payables-to-inventory ratio of 30 percent to 35 percent.”
EBITDA for 2016 is projected to be “negative $800 million to $1 billion,” compared with a loss of $836 million in 2015,” and that’s even presuming Sears hits targeted cost reductions of $550 million to $650 million, Fitch said.
Fitch also noted that Sears has injected about $10 billion in liquidity into the company between 2012 to 2015 to fund ongoing operations. That total includes the $4.7 billion garnered from several real estate transactions. The balance is from expense and working capital reductions and debt issuance.
The ratings agency said Sears still owns about 250 unencumbered Kmart discount and Sears full-line mall stalls. Presuming the same valuation as when Sears sold 235 properties under the Seritage transaction, Sears could get about $2.4 billion in proceeds. Fitch cautioned that the remaining portfolio could be of lower value for the stores since they are in smaller markets or in declining malls.
Sears is also exploring strategic initiatives for its Kenmore, Craftsman and DieHard brands, as well as its Sears Home Services business. One issue is the “ring-fence” around certain assets in connection with the company’s pension liabilities and agreement with the Pension Benefit Guaranty Corp. Fitch believes that any asset sale would require Sears to use the proceeds to pay down the underfunded pension plans before they can be used to fund Sears’ operations.
So far Sears has raised to date $1.55 billion through the issuance of a $750 million asset-backed term loan maturing in July 2020; a $500 million term loan maturing July 2017, and a $300 million term loan maturing 2020 from ESL. Fitch said it expects Sears to be able to fund 2016 holiday inventory through borrowings on its credit facility.
Separately, Sears has found a way to incrementally increase its liquidity by helping Shop Your Way members with the ability to access their pay the day they earn it instead of waiting for a paycheck. The company inked a partnership with Activehours, which integrates the Shop Your Way rewards program into the Activehours’ mobile application. The program works by allowing Shop Your Way members and store associates to access their pay through the app, which gives them points that can be redeemed online or in-store at Sears and Kmart.
Terry Rolecek, president of Shop Your Way Financial Services for Sears Holdings, said, “This partnership allows us to make a difference in our members’ financial lives by providing instant access to their pay the day they’ve earned it.” He noted that the program allows member the convenience of purchasing products and services when they need them rather than having to wait for a paycheck, which has already been earned.