Already a risky proposition, an investment in Sears Holdings Corp.’s bonds just got riskier.
Credit-ratings agency Fitch Ratings has downgraded the long-term issuer default ratings on Sears to “CC” from “CCC,” pushing it further into junk bond status. More importantly, Fitch said it “expects that the risk of restructuring is high over the next 24 months.”
The ratings agency cited the “magnitude” of Sears’ decline in profitability and lack of a clear turnaround plan as reasons for the downgrade.
Of specific concern is Sears’ cash burn, which Fitch said is likely to be around $2 billion or higher annually. Fitch also said that funding options may not be enough to support operations beyond 2016. Issuing debt isn’t a certainty as that’s subject to borrowing base requirements, which have been impacted by the inventory reductions over the past three years. And any sale of leases could also potentially include landlords assuming some of the firm’s more productive sites.
Fitch said even if Sears is able to execute on a number of those options, including asset sales, the funds generated would take the retailer only through 2016, given the high rate of cash burn.
A spokesman for Sears said, “We don’t agree with their action given our demonstrated history of honoring our financial commitments.…We have proven that we have an asset-rich portfolio that provides us with what we believe to be substantial financial flexibility.”
Rob Schriesheim, chief financial officer, said in the company’s second-quarter conference call last month, “We have had success reducing the capital required to run our business, as we have reduced our net inventory investment by about $1.7 billion over the past three years.”
He made a point of telling investors that the company has “sufficient liquidity to run the business and also have the benefit of access to a rich portfolio of assets.”
Investors shrugged off the downgrade as shares of Sears closed up 2 percent to $33.57. That’s 0.6 percent above the close of $33.38 on Aug. 21, when the company posted second-quarter results. Shares of Sears likely have already priced in any negative news, given that Wednesday’s closing price is only 7.4 percent above the 52-week low of $31.26 in April and a 50.3 percent drop from the high of $67.50 in November.