SHLDQ - Sears Holdings Corp

[ragu]

[...]

(B) Lampert does make SHLD his permanent investment vehicle

[...]

Option "B" seems to be a much more plausible result, in my opinion.

 

You'll note that I said "when", not "if".

 

Best,

Ragu

[Luke 532]

Two smart value guys owning so much of the company could also be seen as a problem. Why are all the other smart value guys not touching Sears. Why does a Mike Price not see the value in Sears? I wonder if Lampert is colossally wrong and almost everyone else sees it.

 

I think many do see the value, but just can't stomach the potential patience it might take (or their investors won't allow them to be patient!).  It is a very different situation when you're managing money and have to report quarterly results than it is if you're an individual investor and only have to report to your wife :-)  Most fund managers have quarterly benchmarks they must meet or their investors will leave.  I think that's a major factor in many not touching it.  Heck, look back around 2005 or so to see the tons of fund managers that were singing SHLD's praises... and now Lampert is closer to his end game (I believe this for a variety of reasons) and they are all silent.

[Luke 532]

[...]

(B) Lampert does make SHLD his permanent investment vehicle

[...]

Option "B" seems to be a much more plausible result, in my opinion.

 

You'll note that I said "when", not "if".

 

Best,

Ragu

 

Yes, I should have been more clear.  I was just trying to further point out for readers of this thread some reasons I believe that the odds are in favor of Lampert making SHLD his permanent investment vehicle.

 

If you're believing it's "when" rather than "if" then it boils down to a question of timing.  I don't make my living at timing so I just buy it when I think it's dirt cheap and wait.  The call options are a different matter though, as they involve timing.  Then again, those aren't an investment, more of a trade.

[mevsemt]

Just a quick comment on the short interest/squeeze dynamic...

 

Under some circumstances a short squeeze can have a real impact on the value of a company.  For instance, (and this only happens rarely), an inflated stock price can be used as currency for acquisitions...

 

Now if only there were a good example of this happening - perhaps this will suffice: http://www.chicagotribune.com/business/chi-0411190237nov19,0,6287747.story

 

mevsemt.blogspot.com

[constructive]

Lampert's strategy so far has been the opposite of what shareholders in this thread are suggesting. He has concentrated on removing capital from the business through spinoffs and buybacks. I think there is an inappropriate level of certainty that he will turn 180 degrees and start building capital like Berkshire.

[krazeenyc]

Wow. I had a limit order for 65.5 for about 1/4 of my original position and it hit -- I was out playing with my 3 year old when I got the alert.  Jeeze. I think there are many operational risks with Sears in terms of how they end up best monetizing their assets -- but the assets are there. On the other hand -- it is really hard to not take some profits when the stock appreciates so much with essentially nothing changed for the underlying business. Regardless of the future of the company, the day to day movements of SHLD is truly baffling to me... I guess for all stocks. Of course, I wonder how I would feel if my entry were at $55 instead of $40/41 -- I know that should not impact anything -- but.. . 

 

Let's say you have a sum of the parts analysis that yielded a certain range -- given the impossible assumption that the value could all be extracted tomorrow. How much would you discount that unrealistic range given execution risk both at retail and regarding the real estate, as well as the time discount. I guess it's similar to how I view Intel as being vastly undervalued given its manufacturing lead and its ability to boost earnings significantly when it increases that part of its business.

[rmitz]

LC  "-Speaking of Eddie/Bruce, is this their big mistake? People seem to think they are the next calling of Buffett, but maybe not."

 

Two smart value guys owning so much of the company could also be seen as a problem. Why are all the other smart value guys not touching Sears. Why does a Mike Price not see the value in Sears? I wonder if Lampert is colossally wrong and almost everyone else sees it.

 

Edit: That should read all the other smart value guys other than our host Parsad and the longs here.

 

Btw, I like this board. It's interesting reading. And the short squeeze conversation was a good one.

 

Judging from the float work done earlier, there may just not be that many shares for a big investor to take up a meaningful position, without enormously jacking up the price.  I'm sure those dynamics get looked at.

[LC]

That's my point...maybe the recent run-up is due to a long-investor accumulating whatever shares he can acquire versus shorts covering.

[Luke 532]

http://risnews.edgl.com/retail-best-practices/Sears-Saves-$2M-Per-Year-Moving-Workload-Off-Mainframes88694

 

Posted Date: 10/1/2013

Sears Saves $2M Per Year Moving Workload Off Mainframes

 

“Sears moved workload off of mainframes onto Hadoop and saved $2M per year,” said Aashish Chandra, DVP of Sears Holdings and GM of Metascale, which is Sears’ big data division. Chandra revealed this and much more at the recently completed RIS Cross-Channel Executive Summit, wihch ran from September 25 to 27 at the Four Seasons Dallas at Las Colinas.

 

Chandra also noted that the switch to commodity servers makes sense because “45% of the capabilities on a mainframe are never used and when you switch you can save 60% to 80% of your mainframe costs, which is important because IT budgets are not growing at the same pace as data volumes.”

 

Chandra’s session took a deep-dive look into big data, which is something rarely done at retail conferences. Big data is such a new and important field of expertise that most public speakers are consultants who talk about high-level, non-specific attributes from a 30,000 foot level.

 

Sears, on the other hand, is a true big data pioneer that has learned, made mmistakes and achieved success by hands-on effort. It currently operates the largest enterprise deployment of Hadoop, according to Chandra.

 

Some key takeaways from the session include:

 

    Hadoop is inefficient for small datasets but exponentially better for large datasets compared to using traditional databases.

    Sears big data program is not only charged with solving analytics problems but also to be a revenue rainmaker, which it is successfully doing.

    Amazon used big data capabilities last year during Black Friday to seek out door-buster deals throughout retail and then change its prices every hour to undercut them.

 

[ScottHall]

So, instead of getting back to you all last night, I ate a large Domino's pizza and breadsticks. That was enough to put me in a food coma, so I just went to sleep instead. Here's what I would have posted.

 

 

I've read the whole thread, yes. I wouldn't even qualify most of what's in it as analysis, because there's very little of actual substance. In those cases, there's no conjecture ... because there's no analysis.

 

The past... God, I don't know, probably fifty pages now have been mostly nonsense about short squeezes, whether a short squeeze actually happened, and other misc. things that have no bearing on the long term value of SHLD as a business.

 

The Baker Street report is about the only thing that's been posted recently with any merit.

 

 

I think I may have touched on this earlier, but I'm still a little baffled.

 

I would think that most people view potential catalysts as part of analysis. Do you not think of the short position as a potential catalyst or do you not view catalysts as analysis? I think the going thesis for most people here is that Sears has an IV > than the market value, and the short position might combine with various operational improvements/changes to cause the stock to reach IV quicker than without the short position.

 

Additionally, there has been a significant uptick in the amount of attention paid to Sears Holdings between August 22nd, 2013 and now. There is little information between earnings releases so naturally the attention shifts to those things that can be measured (such as the possible catalyst of having a large short position) in the interim. Also, I've found keeping track of the short interest to be a rather fun exercise between releases of information. This would account for the amount of posts related to the short interest.

 

Correct me if I'm wrong, but I think what you're actually saying is the following: "People are spending a lot of time talking about something that's not interesting to me." Well, that's unfortunate, but there's probably a better way to steer the conversation towards things that matter to you than saying everyone has been talking nonsense.

 

I'm reminded of a quote from Randy Pausch's "The Last Lecture" where his adviser said it was a shame that people perceived of him as arrogant because it's going to limit what he's going to be able to achieve in life. Another way to say that you catch more flies with honey I guess. Remember, you're asking people to show you their work -- it's probably better to do it nicely.

 

Moreover, this is a nitpick, but are you saying that Baker Street's presentation is full of conjecture? Logically, you must be doing that, because of your previous comment -- but I actually think this is not what you mean. I only point this out because, as I indicated above, words matter.

 

Yes, Baker Street's analysis does have conjecture within it. Pretty much all of the analysis on Sears does. It also contributes some new facts to the discussion, though, so you can see that in the past I've still referred to it as pretty good.

 

I'm not sure what you're talking about regarding being nice, or me asking others to show me their work. I'm not intending to offend you or be mean, and as far as I can tell, I've never asked any of you to show your work.

 

The squeeze topic seemed completely appropriate given the high short interest. Having shorted many stocks, SHLD was exactly the kind of

stock I would have avoided - high short interest, primarily held by LT oriented investors - and subject to any positive catalyst that

could cause the stock to take off. All this worthless discussion was pointed out by a few who bothered to dig deeper. And one poster, in particular,

took the time to figure out what the "real float" might be in a logical and well thought out argument. Turned out he was right and in the

space of 6 weeks SHLD is up 50%.  How in the world is this not appropriate and nonsense? Was it just that Merkhet and others

were just so lucky that it all came together, like a random walk?

 

Quite a few of us have made a lot of money off these nonsense posts.

 

If you can point to anywhere where I've said that acknowledging the short interest is "not appropriate," I'd like to see it. In fact, if you go back to my first post on the subject, you'll notice that I referred specifically to one poster's tendency to make incessant posts about the subject, such as writing additional posts about how the short interest was actually 72% as opposed to the 68% he thought it was previously.

 

It is the intense focus and time spent on such minute detail rather than just acknowledging the general size of the short interest that is nonsense. The excess time could be invested much better elsewhere, and all that posting about it nonstop does is clog up the thread to make it difficult to find other facts that have been posted in an efficient manner. The search tool here isn't good enough to make the quantity of posts irrelevant.

 

As for making money from the nonsense posts, I find it highly unlikely that you've made a lot of money because of the nonsense posts. For that to be the case, your purchase of Sears must have been contingent on reading those posts. Otherwise, you would have experienced the recent run up regardless. If you did purchase shares of Sears because of the short interest, then congratulations on the profit. But you'd be speculating, not investing.

 

Further, we have no evidence that the recent run up is the the result of a short squeeze. In fact, Luke himself acknolwedges that the short interest remains largely unchanged. It is entirely possible that Berkowitz or another holder is just accumulating more shares. The money spends the same, so it doesn't really matter, but I would advise against making such assumptions without any evidence to support it.

 

 

So far, every analysis I've seen of the situation is full of conjecture and, in some cases, "facts" that are just outright incorrect which could have been learned from reading the credit agreements. If Eddie turns SHLD around or turns it in to a legitimate capital allocation vehicle, I'll be on board with him until he decides to retire - even if I do have to pay a higher price for entry. Until then, or until I become aware of facts that change my mind, Sears is just too rich for my blood.

 

Scott, could you share your view or analysis on SHLD and point out the incorrect "facts"? I think the bear case needs to be heard on this thread.

 

I've pointed out the incorrect facts before. Check my posting history about the guarantor/non-guarantor structure; that's the biggest myth I've seen about SHLD. And, by the way, the debt isn't the only liability Holdings would be on the hook for in bankruptcy. Thanks to controlled group liability a big liability from the pension could also flow up to Holdings depending on the extent interest rates bail them out.

 

I've gone over my thought process here countless times, so I'm just going to copy and paste part of my end of a private discussion I had with another member of this forum. Some of it's dated by now, so keep that in mind.

 

---

 

Here are my thoughts on SHLD's capital structure. If you have a difference of opinion or think I am wrong about something, point it out. I think it's useful to compare notes.

 

As I mentioned before, and because of what the guarantee agreement states, Holdings is a guarantor for the debt drawn on SRAC's and Kmart's credit line.

 

SECTION 2. GUARANTEE

 

2.1 Guarantee. (a) Each of the Guarantors (other than the Borrowers) hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Control Co-Collateral Agent, for the ratable benefit of the Credit Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by each Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations of such Borrower. Each Borrower hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Control Co-Collateral Agent, for the ratable benefit of the Credit Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by each other Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations of each such other Borrower.

 

From Exhibit 10.4 here: http://www.sec.gov/Archives/edgar/data/1310067/000119312511144672/0001193125-11-144672-index.htm

 

Because Holdings is listed as a guarantor, that indicates that SHLD is on the hook for any deficiency relating to the SRAC/Kmart revolver. Whether that is relevant remains to be seen, considering that the SRAC/Kmart revolver is secured by a first lien on Sears' and Kmart's inventory.

 

Based on the current balance sheet - with $1.4 billion drawn and $7.1 billion of inventory in the most recent 10-Q - my best guess is that the claim would currently end up being fully covered by inventory liquidation, but considering that the revolver has a ceiling of $3.275 billion, that may not always be the case. What is currently outstanding and current inventory levels are likely irrelevant to that part of the analysis, because the balance sheet would probably look a lot different heading in to Chapter 11.

 

Then there's the $1.2 billion note at Holdings, which has a second lien on the inventory and is guaranteed by most of the subsidiaries. It isn't guaranteed by Sears Re, as is often pointed out, but in my view that could be irrelevant because if Holdings was to default, the creditors would likely end up getting the equity of Holdings and end up owning the entity that owns the equity of Sears Re anyway. A case could be made that the hidden assets will be enough to satisfy creditors and leaving equity intact, but that would make the whole non-guarantor/guarantor debate moot.

 

[EDITING NOTE: Part of the remainder of the message is redacted to protect the other person's proprietary analysis.]

 

If not, it might make the SRAC debt particularly attractive if you think those properties are very undervalued. SSRAP - the exchange traded ABS version - currently trades at $14 and has a par of $25. The 7.25% coupon makes for a current yield of about 12.93%. They trade at a bit of a discount to the actual notes, which are selling at about 65% of par according to Morningstar. They're the 2032 ones.

 

http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=SHLD&Country=USA

 

A Trust Wind-Up Event will occur

                                            upon (i) redemption by the Security

                                            Issuer of all Securities held by the

                                            Trust, (ii) exercise of the call

                                            rights under the Swap Agreement as

                                            to all Securities held by the Trust,

                                            (iii) a Security Default, (iv)

                                            designation by the Swap Counterparty

                                            of an Early Termination Date under

                                            the Swap Agreement following an

                                            "Illegality" or "Tax Event" under

                                            the Swap Agreement, (v) the

                                            Securities becoming Disqualified

                                            Securities, or (vi) any Excess

                                            Expense Event (as defined in the

                                            Prospectus). The Trust will

                                            terminate in connection with any

                                            Trust Wind-Up Event.

 

Unfortunately, the SSRAP Trust will get liquidated if SRAC defaults on the loan, so the discount is warranted. If planning to hold through a bankruptcy scenario, it'd make more sense to just pay the premium for the notes.

 

http://www.sec.gov/Archives/edgar/data/1071246/0000903423-03-000069.txt

 

I know that the prospectus says the the notes are not guaranteed by Sears, Roebuck, so it looks like it shouldn't matter that [REDACTED].

 

According to its public reports, Sears Roebuck Acceptance Corp. (the

"Security Issuer") is a wholly-owned finance subsidiary of Sears, Roebuck and

Co. ("Sears") that was incorporated under the laws of Delaware in 1956. To meet

certain capital requirements of its businesses, Sears borrows on a short-term

basis through the issuance of notes to, and in the past sold receivable balances

to the Security Issuer. The Security Issuer obtains funds through the issuance

of unsecured commercial paper and long-term debt, which includes medium-term

notes and discrete underwritten debt. All of the Security Issuer's outstanding

common stock is owned by Sears, which will not guarantee the Securities.

 

Considering that SRAC quit filing with the SEC back in 2005, that might be a concern because you wouldn't be able to get much information on the financial status of the company beyond what little is released in SHLD's 10-K filings and that SRAC is a borrower on the revolver.

 

But Sears, Roebuck (not Holdings!) changed its tune in 2003 and decided to guarantee the SRAC notes after all in order to prevent SRAC from being deemed an investment company by the SEC, so they aren't limited to just the SRAC entity for a recovery. They can look to Sears, Roebuck as well, so if the real estate is undervalued they might end up with a reasonable return. It's hard to be certain, though. [EDITING NOTE: I think it is also possible SRAC and Sears, Roebuck could be substantively consolidated.]

 

Sears has issued guarantees in support of SRAC's outstanding public

debt in order to maintain SRAC's exemption from being deemed an

"investment company" under the Investment Company Act of 1940, as

amended. These guarantees are continuous, have no recourse provisions

and require Sears to repay all of SRAC's outstanding debt, including

interest and principal, and any obligations under the credit

facility, in the event SRAC defaults on its payment obligations.

 

http://www.sec.gov/Archives/edgar/data/88255/000008825505000002/r10k04.txt

 

Here is the supplemental indenture including the guarantee agreement for the notes I linked to. The notes covered are towards the bottom of the document. I do not own any Sears or SHLD securities right now. The only two that I think are interesting at all at current prices are the common and the SRAC notes, but I think the SRAC notes would fall a lot in BK and are not too likely to provide phenomenal returns outside of it so long as the dark cloud hangs over SHLD.

 

If the dark cloud goes away, I'd rather just own the common. But I do have concerns. I believe SHLD reports this morning, so we'll see if anything has changed.

 

http://www.sec.gov/Archives/edgar/data/88255/000008825503000142/rexhibit4f.txt

 

If you think I'm wrong about anything - I definitely could be - please feel free to share. Also, please let me know your own thoughts regarding SHLD and its capital structure. I respect your opinions more than most people's, so I'd love to hear what you have to say.

 

It is very late here, so I'm going to get some sleep. I hope this was useful to you in some capacity, even if you've read it all already.

 

[/quoting myself like BB]

 

I think you´re still missing my point. Note that many of the longs here have been trying to kill their thesis and that in my original post I am actually recognising that I am fallible.

 

Remember that you are making decisions under uncertainty, no matter the amount of facts you gather.

 

I agree entirely. My trouble is that the uncertainty here is so high I can't adequately handicap it. Sears may well be extremely undervalued. I hope it is - I indirectly own it through my 401(k) stake in Fairholme - but I'm not willing to make an investment where I don't think I'm even close to being able to handicap the outcome. The only things I know for certain indicate that Sears is in some serious trouble, so I've avoided investing in it until now.

 

Also, I had no intention of being mean or offending any of you. I am stating my thoughts about what I think adds value and not, but even though I think a lot of the posts have been silly, that doesn't mean I hold any ill will towards any of you. I hope that you understand this.

 

I guess that's about it. Have a good one.

 

Best wishes,

 

Scott

 

EDITS: Fixed two typos.

[merkhet]

 

Yes, Baker Street's analysis does have conjecture within it. Pretty much all of the analysis on Sears does. It also contributes some new facts to the discussion, though, so you can see that in the past I've still referred to it as pretty good.

 

 

I've been wondering if we've been laboring under different definitions of the word "conjecture." What in the presentation struck you as conjecture? I'm looking for just one example for calibration -- though you're free to offer more if you'd like.

 

 

I'm not sure what you're talking about regarding being nice, or me asking others to show me their work. I'm not intending to offend you or be mean, and as far as I can tell, I've never asked any of you to show your work.

 

 

When you write things like "COB&F once again showing it doesn't know the difference between investment and speculation" (see attached screenshot) you're probably going to get a negative reaction from people. Most people on this board would likely find it offensive to be told they don't know the difference between investment and speculation. This should not be surprising.

 

 

If the thread would stick to material facts about the business, I think it would be more useful. As it is, the incessant posts with little in the way of substance make the thread difficult to navigate and find the content of merit that has been posted here.

 

 

You're asking people to stop doing one thing and start doing another. (Maybe "show your work" was overstating it.) You'd get better results if you did it in a nicer way. Again, I don't think this is a controversial idea.

 

 

If you can point to anywhere where I've said that acknowledging the short interest is "not appropriate," I'd like to see it. In fact, if you go back to my first post on the subject, you'll notice that I referred specifically to one poster's tendency to make incessant posts about the subject, such as writing additional posts about how the short interest was actually 72% as opposed to the 68% he thought it was previously.

 

 

I think telling people to stick to the material facts of a business is likely the same thing as saying that acknowledging the short interest is inappropriate.  Maybe the words are different, but the intent seems to be largely the same.

 

 

It is the intense focus and time spent on such minute detail rather than just acknowledging the general size of the short interest that is nonsense. The excess time could be invested much better elsewhere, and all that posting about it nonstop does is clog up the thread to make it difficult to find other facts that have been posted in an efficient manner. The search tool here isn't good enough to make the quantity of posts irrelevant.

 

 

Saying "God, I don't know, probably fifty pages now have been mostly nonsense about short squeezes, whether a short squeeze actually happened, and other misc. things that have no bearing on the long term value of SHLD as a business" is different than saying that the number of pages devoted to the short interest is nonsense. The former sentence refers to the content as nonsense. The latter refers to the amount of attention paid as nonsense. I think you know that.

 

You seem to be a good analyst, and I hope you stick around and provide insight to this thread and/or other threads -- the problem is that there is a certain... "Harry Long"-ness to your posts that is rubbing people the wrong way.

[cubsfan]

Scott - After many years of successful investing,  I know the difference between speculating and investing.

 

I guess one man's speculation is another man's catalyst.

 

You were pretty clear that the short interest/squeeze topic was nonsense - and it is very relevant here.

Many of those who have followed the discussion have benefited. Maybe we are all just speculators in your mind.

 

Intelligent investors disagree all the time.

[arbcon]

Scott's analysis is actually very similar to my own. I've followed a lot of Chapter 11 workouts, and I've learned that Courts can be expansive in their interpretation of substantive consolidation and control issues. For example, in a bankruptcy, would Eddie be subordinated ? It's something I think about.

Speculation, as we all know, comes from the Latin"to observe', and, to me ,therefore means something different than its popular synonym-gambling.

For the bonds to be good, the inventory , in my view, has to be good. We'll have a test of the quality of inventory as we head through the Christmas Season. The real estate is interesting, but not enough ,by itself, for me to make the investment. Eddie is quite smart and I think tough as well. I've only had a breakfast with him once long ago, so perhaps I am wrong. Sears is a test of Warren's "good management bad business". For me, personally, it's been quite interesting working through the company.

[JAllen]

Many people keep mentioning the possibility of SHLD filing for bankruptcy and analyzing it in that context.  Can someone tell me why anyone would ever consider a stock that had even a remote chance of going bankrupt for an investment? 

 

 

Is this a scenario that people actually think could occur in the near future?  Would someone please articulate how this would come about, if so?

 

 

Thank you.

[Guest wellmont]

the holding company would not file for bk. my understanding is that he could file at the subsidiary level and possibly strengthen the holding company (shld) in the process. but I am not sure if this is true or not. :)

[constructive]

Many people keep mentioning the possibility of SHLD filing for bankruptcy and analyzing it in that context.  Can someone tell me why anyone would ever consider a stock that had even a remote chance of going bankrupt for an investment? 

 

 

Is this a scenario that people actually think could occur in the near future?  Would someone please articulate how this would come about, if so?

 

 

Thank you.

 

They have debt due in 2018 so that is when the risk is concentrated. In the shorter term they have cash and they can continue to sell real estate.

 

the holding company would not file for bk. my understanding is that he could file at the subsidiary level and possibly strengthen the holding company (shld) in the process. but I am not sure if this is true or not. :)

 

Not true, the holding company and the guarantor subs cross guarantee most liabilities. If Sears or Kmart go bankrupt, SHLD goes bankrupt as well.

 

edit: The non-guarantor subs are bankruptcy remote, but they're in good financial position relative to the rest of the company so it's irrelevant.

[merkhet]

 

Not true, the holding company and the guarantor subs cross guarantee most liabilities. If Sears or Kmart go bankrupt, SHLD goes bankrupt as well.

 

edit: The non-guarantor subs are bankruptcy remote, but they're in good financial position relative to the rest of the company so it's irrelevant.

 

 

I think you're describing cross-default rather than the guarantee structure. In this case, if the guarantor subs can't make the creditor whole, then the creditors can go to the holding company. If the holding company can't find the liquidity or solvency to make the creditor whole, then the holding company might have to file for bankruptcy.

 

If memory serves me, the documents don't have a cross-default provision.

[constructive]

 

Not true, the holding company and the guarantor subs cross guarantee most liabilities. If Sears or Kmart go bankrupt, SHLD goes bankrupt as well.

 

edit: The non-guarantor subs are bankruptcy remote, but they're in good financial position relative to the rest of the company so it's irrelevant.

 

 

I think you're describing cross-default rather than the guarantee structure. In this case, if the guarantor subs can't make the creditor whole, then the creditors can go to the holding company. If the holding company can't find the liquidity or solvency to make the creditor whole, then the holding company might have to file for bankruptcy.

 

If memory serves me, the documents don't have a cross-default provision.

 

You're right. I think in this case cross guarantee is pretty close to cross default. There would be no purpose to a guarantor sub solo defaulting if the holding company still has to pay almost all their liabilities.

[merkhet]

I think they would try to dividend something up from the non-guarantor subs before they threw the HoldCo into bankruptcy.

[muscleman]

I think they would try to dividend something up from the non-guarantor subs before they threw the HoldCo into bankruptcy.

 

I did a bit of research on "Fraudulent conveyance" and "Fraudulent transfer"

http://www.caddenfuller.com/CM/Articles/Articles38.asp

 

"The timing of the transfer is important in determining whether the transfer will stand or not.  Only those transfers completed or “perfected” within a year of the filing of the petition for bankruptcy may be reversed. "

 

So I think if Eddie fails to turnaround the company, he can simply spin off most of the good assets, keep SHLD alive for another year, and then let it go to chp 11, and shareholders of SHLD will still be good.

With such high short interest, if he does that spin off, I think shorts will go toward panicky covering. After all, if I short at $60, and I had to pay $70 to my stock lender for his new spin off stock, then I would be guaranteed to lose money, so I have to cover immediately.

[merkhet]

muscleman, that's not quite what I meant.

 

I meant that, rather than throwing the HoldCo into bankruptcy, the non-guarantor subs can dividend up some assets to the HoldCo to make the creditors of the guarantor loans and/or the HoldCo debt whole.

 

Edited: Of course, Sears could go down your route as well.

[merkhet]

I've been thinking for the past few days about something that Bruce Berkowitz said off-hand about Sears in one of his many interviews. He indicated that he believes Eddie Lampert hasn't made any mistakes so far (or that he would have made the same moves that Eddie has made.)

 

This was intriguing to me, so I decided to dig a little more, and I think I agree. In the years between the merger and the financial crisis, Sears was minting over a billion of free cash flow. My guess is that Eddie thought he could do the same thing he did previously at Autozone and Autonation, so he started repurchasing shares like crazy.  Between 2006 and 2010, he retired about 1/4 of the outstanding shares.

 

At the same time that the financial crisis was hitting, it turns out that online shopping (namely Amazon) was really cutting into retail -- between 2008 and now, Amazon's revenues have tripled -- and the combination of those two things made the retailing aspect of the business much more difficult. Once this became abundantly clear by 2011, Eddie started closing stores in 2012 and started the three subsidiaries (SHC, Seritage and Ubiquity) that get so much press on this thread.

 

I think that, in hindsight, we can certainly say that he probably shouldn't have bought so many shares back when he did -- but given the information he had at the time, it's sort of difficult for me to find fault with his decision-making process.

 

Thoughts?

[Luke 532]

AutoNation is killing it: http://investors.autonation.com/phoenix.zhtml?c=85803&p=irol-newsArticle&ID=1860862&highlight=

 

Makes Lampert's conviction in SHLD even more notable as he has been aggressively selling his stake in AN.  Or he's an idiot taking money out of AN and becoming more concentrated in SHLD  ;)

[enoch01]

 

I think that, in hindsight, we can certainly say that he probably shouldn't have bought so many shares back when he did -- but given the information he had at the time, it's sort of difficult for me to find fault with his decision-making process.

 

Thoughts?

 

I don't blame him for the big-picture decisions he has made with regard to retail operations.  However, I think he should have known (but perhaps did not) that retail operations were going to suffer significantly when he started to curtail capex.  I'm not talking about pulling a Ron Johnson, I'm talking about making sure you have good lighting.

 

So given that, I don't think it was a good idea to spend all of that cash on the buybacks.  Sears is really in a cash-starved situation right now.  That is a function of deteriorating sales, which is a function of not spending on the stores.

 

But hey, if it weren't for that, maybe we wouldn't have been able to load up on such cheap shares a few weeks ago.  It's hard to know these kind of things.

 

EDIT:  I'm also not sure it was a good idea to subdivide the company into such fine granularity.  In the end it will help him decide what to save, but it accelerated the melting of the ice cube.

[merkhet]

 

I don't blame him for the big-picture decisions he has made with regard to retail operations.  However, I think he should have known (but perhaps did not) that retail operations were going to suffer significantly when he started to curtail capex.  I'm not talking about pulling a Ron Johnson, I'm talking about making sure you have good lighting.

 

So given that, I don't think it was a good idea to spend all of that cash on the buybacks.  Sears is really in a cash-starved situation right now.  That is a function of deteriorating sales, which is a function of not spending on the stores.

 

But hey, if it weren't for that, maybe we wouldn't have been able to load up on such cheap shares a few weeks ago.  It's hard to know these kind of things.

 

EDIT:  I'm also not sure it was a good idea to subdivide the company into such fine granularity.  In the end it will help him decide what to save, but it accelerated the melting of the ice cube.

 

 

I think I agree a little bit, and I disagree a little bit. In the end, do I think that spending more on the stores would have kept sales from deteriorating as much as it did? I don't think so. Would it have staunched a bit of the bleeding? Probably.

 

Again, difficult to know whether the return on the additional capital spent on the stores would have been worth it in the end...