A Sears store.

Sears Holdings Corp. said it plans to commence exchange offers for certain notes to enhance the company’s liquidity.

Based on the disclosed terms for the discussions, the exchange would enhance Sears’ liquidity by changing the form of the interest payment from cash to payment-in-kind.

One planned exchange converts the 8 percent Senior Unsecured Notes due 2019 to one that has an option for convertibility into the common stock of Sears, with interest on the notes to be payable in kind at the company’s option. The other exchange is for 6-5/8 percent senior secured notes due 2018 to new notes due 2019, also convertible into common shares of Sears, featuring the same PIK option. While both notes are would be optionally convertible by the holders, they would also be mandatorily convertible at the company’s option under certain conditions.

Fitch Ratings, a credit ratings agency, downgraded Sears Holdings to “C” from “CC,” on what it called a distressed debt exchange. The downgrade follows a similar move by competing ratings agency S&P Global Ratings last week.

Fitch also said that while the changes would result in annual cash interest savings of more than “$100 million, the contemplated exchanges wouldn’t materially change Fitch’s expectations for an annual cash burn of $1.2 billion.” Sears earlier this month said it was in discussions with certain lenders to amend the terms on possibly more than $1 billion of its non-first-lien debt that would include the reduction of cash interest expense and the extension of the maturity of some of that debt.

According to Fitch, those discussions could include an amendment of the $300 million second-lien term loan due 2020 that would allow for PIK interest and for the loan to be convertible to common stock, as well as the $95 million of senior unsecured SRAC notes due between 2027 and 2043. The discussion on SRAC notes could result in new unsecured notes maturing in March 2028 that would allow for PIK interest, according to the ratings firm.

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