Leveraged balance sheet
Sears Holdings (SHLD) has been obtaining debt financing from several lenders in order to stay afloat. Sears’s balance sheet as of October 28, 2017, had $2 billion in long-term debt and capitalized lease obligations, while it had another $1.1 billion as short-term borrowings.
Recently, the company obtained another $210 million loan from ESL Investment, which is a hedge fund owned by Sears Holdings’ CEO Edward Lampert and other lenders. On January 10, 2018, the company raised $100 million from other counterparties. ESL Investments has loaned over $2 billion to Sears in the past two years, according to a Business Insider report in October 2018.
Recent debt exchange puts liquidity issues in the spotlight
To repay debt, the company has been selling its assets. However, Sears’s recent distressed debt exchange has become a concern, as it underscores that asset selling won’t help much as long as the company continues to bleed cash and sales and profitability show no signs of improvement.
On January 23, 2018, the company said it was pursuing debt exchange by lengthening the senior notes maturity due in 2018 to 2019. It is also amending terms with certain lenders to enable payment of interest on the loan in kind. This announcement prompted both Moody’s (MCO) and Fitch to downgrade their ratings. Moody’s (MCO) downgraded the company’s CFR rating to “Ca” from “Caa3.” Even Fitch Ratings has downgraded Sears Holdings Long-Term Issuer Default Ratings to “C” from “CC” after the announcement of the debt exchange.
Moody’s vice president, Christina Boni, stated that in the face of the shrinking asset base and ever elusive turnaround, debt exchanges were necessary. However, in the next year, Sears will have $1.2 billion worth of debt maturing, while its cash used in operations will likely be around $1.8 billion. Moody’s maintains a negative outlook on the company.