SHLDQ - Sears Holdings Corp

[wisdom]

Either way we will have clarity on this issue by 2015 or 2016.

 

Is he able to stop the bleeding or not? Have his investments started to pay off or not.

 

If not, how does he play his hand.

 

Did he know what he was trying or as most expect he doesn't have a clue and is wasting his time/money along with my time and money?

 

[merkhet]

The short interest as of December 31, 2013 was 13,769,181 -- I suspect it will be a mite higher next time around.

[Guest wellmont]

Moody downgrade

 

https://www.moodys.com/research/Moodys-downgrades-Sears-Holdings-Corporate-Family-Rating-to-Caa1--PR_290451?WT.mc_id=NLTITLE_YYYYMMDD_PR_290451

 

Moody's expects full year cash burn (after capital spending, interest and pension funding) to be around $1.2 billion in 2013 and we expect Sears' cash burn to remain well above $1 billion in 2014.

 

That is the problem, there is no end in sight to the cash burn and its continual destruction of equity value.

 

srac bonds down 15% today. Bonds.

[Guest wellmont]

With $1B in cash and another $300 mil coming today - hoping that he does some buybacks. It would be nice to bring down the share count to 100 mil.

 

buybacks have been OFF the table for going on two years now. companies that are in Distress don't buy back stock. they conserve cash. If you are burning furniture to heat the house you don't take the welfare check and go buy a new flat screen. well rational people don't.

[ERICOPOLY]

With $1B in cash and another $300 mil coming today - hoping that he does some buybacks. It would be nice to bring down the share count to 100 mil.

 

buybacks have been OFF the table for going on two years now. companies that are in Distress don't buy back stock. they conserve cash. I you are burning furniture to heat the house you don't take the welfare check and go buy a new flat screen. well rational people don't.

 

He can show higher losses per share if he retires more stock.

[TwoCitiesCapital]

With $1B in cash and another $300 mil coming today - hoping that he does some buybacks. It would be nice to bring down the share count to 100 mil.

 

buybacks have been OFF the table for going on two years now. companies that are in Distress don't buy back stock. they conserve cash. I you are burning furniture to heat the house you don't take the welfare check and go buy a new flat screen. well rational people don't.

 

He can show higher losses per share if he retires more stock.

 

Lol

[muscleman]

I have been thinking about it all day.

I think it all boils down the to corporate structure and recourse vs non-recourse debt question that I asked last year.

SHLD holds sears and kmart retail subs' equity. From the Q4 update, it is clear that he is doing fast liquidation and raising cash. Where did the cash go? Did he move all that cash from the retail subs to the parent level? If that is the case, AND the retail subs' debt are non-recourse to parent, then everything would make sense. As he continue to liquidate more and more assets in the crappy subs and move them to parent, eventually this can easily become a net-net.

But on the other hand, if this is not the case, either the cash he milked out is still in the retail subs, or the retail sub's debt are recourse to parent, then I think it is a very dangerous game.

To answer question #1: Has the cash been moved to parent? We can look at the 10-k when it came out. I believe he will give the parent, guarantor and non-guarantor balance sheet breakdown again.

To answer question #2, well, since I asked about it a year ago and no one answered, I doubt if anyone has an answer now. I could not answer that question either.

To be honest, I doubt that the debts in the retail subs are non-recourse to parent. Because in that case, he can simply spin off LE and let the parent hold that equity instead of letting the retail subs to hold that equity. He doesn't need to spin the LE equity off to shareholders. I think the reason he wants to spin off LE to shareholders is because the SHLD parent could be dangerous.

 

Thoughts? :)

[ERICOPOLY]

They need to shrink the sqft of the stores faster than the decline in same-store-sales.  Then you'd have positive year over year sales comps on a per-sqft basis, even though overall revenues are down.

 

So like if you slash the footprint of each store by 70%, then if sales only drop by 9% it's a positive outcome.

 

I went to the Tesla factory in Fremont this past July.  They use only a tiny footprint of that massive automotive plant -- you just see some tarps hanging here and there to partition off the space, and then the rest of the building is this big unlit dark "corner" (you are actually standing in the lit corner and the rest of the building is dark).

 

So can Sears get some office dividers and shut off 1/2 of the store to foot traffic?

 

I can't tell if I'm joking or not.  But I guess that is sort of part of the strategy -- maintain a smaller footprint and lease out space in the rest of the store to other retailers.

 

But I suppose that's how you compensate for losing a ton of customers -- shrink the store.

[muscleman]

I have been thinking about it all day.

I think it all boils down the to corporate structure and recourse vs non-recourse debt question that I asked last year.

SHLD holds sears and kmart retail subs' equity. From the Q4 update, it is clear that he is doing fast liquidation and raising cash. Where did the cash go? Did he move all that cash from the retail subs to the parent level? If that is the case, AND the retail subs' debt are non-recourse to parent, then everything would make sense. As he continue to liquidate more and more assets in the crappy subs and move them to parent, eventually this can easily become a net-net.

But on the other hand, if this is not the case, either the cash he milked out is still in the retail subs, or the retail sub's debt are recourse to parent, then I think it is a very dangerous game.

To answer question #1: Has the cash been moved to parent? We can look at the 10-k when it came out. I believe he will give the parent, guarantor and non-guarantor balance sheet breakdown again.

To answer question #2, well, since I asked about it a year ago and no one answered, I doubt if anyone has an answer now. I could not answer that question either.

To be honest, I doubt that the debts in the retail subs are non-recourse to parent. Because in that case, he can simply spin off LE and let the parent hold that equity instead of letting the retail subs to hold that equity. He doesn't need to spin the LE equity off to shareholders. I think the reason he wants to spin off LE to shareholders is because the SHLD parent could be dangerous.

 

Thoughts? :)

 

I looked at last year's 10-k for guarantor non-guarantor breakdown in the balance sheet, and the parent level carries no cash at all. So my theory that he is starting fast liquidation, move the cash to parent and planning to let the retail subs die is incorrect.

I am guessing that he is still sticky to his SWY plan for now. :(

[valueyoda]

As long as one can legally assume that Sears Holdings can spin off its real estate assets (e.g. Seritage Realty Trust LLC) without violating its bond and bank debt indentures, SHLD's current share price offers a significant margin of safety. If one carefully reads the appendix of the Baker Street SHLD presentation, there seems to be a high probability that this is the case, even if one puts the retail operations into bankruptcy.

 

The question, however, comes down to timing. Given the fact that Baker Street is highly concentrated through its ownership of common shares and call option construction, it is paramount that SHLD needs to take drastic action to highlight the value of its asset portfolio and/or to monetize its asset base. I am not sure what the expiration date is on those options, but from what I have read, it strikes me as a call spread with a strike price of $60-65.  Secondly, given the rapid decline since early December, I am convinced that Eddie Lampert feels the need for drastic action, as more redemptions could follow if the share price doesn't recover quickly. Finally, I think that Alvarez's presence on the SHLD board could hint that Berkowitz wants to speed up the liquidation process.

 

Bytheway, I think it is really interesting that Baker Street created a Cayman SPV, Baskerville SPV, (how can you not love those Sherlock Holmes references), to specifically invest in Sears Holdings.

[CorpRaider]

Paramount to whom, though?  They are just a passenger on this train.

[ZenaidaMacroura]

As long as one can legally assume that Sears Holdings can spin off its real estate assets (e.g. Seritage Realty Trust LLC) without violating its bond and bank debt indentures, SHLD's current share price offers a significant margin of safety. If one carefully reads the appendix of the Baker Street SHLD presentation, there seems to be a high probability that this is the case, even if one puts the retail operations into bankruptcy.

 

The question, however, comes down to timing. Given the fact that Baker Street is highly concentrated through its ownership of common shares and call option construction, it is paramount that SHLD needs to take drastic action to highlight the value of its asset portfolio and/or to monetize its asset base. I am not sure what the expiration date is on those options, but from what I have read, it strikes me as a call spread with a strike price of $60-65.  Secondly, given the rapid decline since early December, I am convinced that Eddie Lampert feels the need for drastic action, as more redemptions could follow if the share price doesn't recover quickly. Finally, I think that Alvarez's presence on the SHLD board could hint that Berkowitz wants to speed up the liquidation process.

 

Bytheway, I think it is really interesting that Baker Street created a Cayman SPV, Baskerville SPV, (how can you not love those Sherlock Holmes references), to specifically invest in Sears Holdings.

 

Does bakerstreet have a position, great or small, in the common?

 

And did they create the spv to side pocket the position, or was it tailored initially as a separate entity from their regular fund?

[muscleman]

As long as one can legally assume that Sears Holdings can spin off its real estate assets (e.g. Seritage Realty Trust LLC) without violating its bond and bank debt indentures, SHLD's current share price offers a significant margin of safety. If one carefully reads the appendix of the Baker Street SHLD presentation, there seems to be a high probability that this is the case, even if one puts the retail operations into bankruptcy.

 

The question, however, comes down to timing. Given the fact that Baker Street is highly concentrated through its ownership of common shares and call option construction, it is paramount that SHLD needs to take drastic action to highlight the value of its asset portfolio and/or to monetize its asset base. I am not sure what the expiration date is on those options, but from what I have read, it strikes me as a call spread with a strike price of $60-65.  Secondly, given the rapid decline since early December, I am convinced that Eddie Lampert feels the need for drastic action, as more redemptions could follow if the share price doesn't recover quickly. Finally, I think that Alvarez's presence on the SHLD board could hint that Berkowitz wants to speed up the liquidation process.

 

Bytheway, I think it is really interesting that Baker Street created a Cayman SPV, Baskerville SPV, (how can you not love those Sherlock Holmes references), to specifically invest in Sears Holdings.

 

As I pointed out earlier in a SHLD's 13G filed by baker street, they said they have 9.45 mn shares in the form of call options, expiring within the next 60 days. They filed in early December, so I think they have the January call options that will soon expire.

 

Why do they create a Cayman SPV for the SHLD investment? What is the point?

[valueyoda]

It wouldn't be important as a standalone argument. But I can imagine that if you are highly concentrated concentrated in out-of-the-money call options with a certain expiration date of that magnitude relative to your fund that you will pull all rabbits out of the hat to make this investment work. Their presentation was the reason why the stock ran from the low $40s to $65. Given the redemptions at ESL, Eddie Lampert doesn't have luxury of waiting around anymore that he had 5 years ago. Plus at a certain point, Berkowitz has to factor in the opportunity cost of waiting around for the liquidation to materalize. Therefore, I think for the first time in years that the need for drastic action is near, as all players have a fiduciary duty to their investors as well.

[ZenaidaMacroura]

As long as one can legally assume that Sears Holdings can spin off its real estate assets (e.g. Seritage Realty Trust LLC) without violating its bond and bank debt indentures, SHLD's current share price offers a significant margin of safety. If one carefully reads the appendix of the Baker Street SHLD presentation, there seems to be a high probability that this is the case, even if one puts the retail operations into bankruptcy.

 

The question, however, comes down to timing. Given the fact that Baker Street is highly concentrated through its ownership of common shares and call option construction, it is paramount that SHLD needs to take drastic action to highlight the value of its asset portfolio and/or to monetize its asset base. I am not sure what the expiration date is on those options, but from what I have read, it strikes me as a call spread with a strike price of $60-65.  Secondly, given the rapid decline since early December, I am convinced that Eddie Lampert feels the need for drastic action, as more redemptions could follow if the share price doesn't recover quickly. Finally, I think that Alvarez's presence on the SHLD board could hint that Berkowitz wants to speed up the liquidation process.

 

Bytheway, I think it is really interesting that Baker Street created a Cayman SPV, Baskerville SPV, (how can you not love those Sherlock Holmes references), to specifically invest in Sears Holdings.

 

As I pointed out earlier in a SHLD's 13G filed by baker street, they said they have 9.45 mn shares in the form of call options, expiring within the next 60 days. They filed in early December, so I think they have the January call options that will soon expire.

 

Why do they create a Cayman SPV for the SHLD investment? What is the point?

 

I think they filed it in earlier quarters too.  Doesn't it mean they "can" exercise?  I am dubious that the wording implies the expiry is within 60days.

[valueyoda]

I am not sure whether it is a specific tailor made fund or a side pocket. I guess it is a tailor made fund as the presentation showed SPV pitch in my tab.

[ZenaidaMacroura]

Also are you guys figuring the nominal value of the callswhen you say the position is critical to baker? how big is the call premium relative to their aum?

[valueyoda]

It is hard to know if we don't know the specifics, and even whether they are constantly rolling over the option positions to maintain the same exposure. Even aside from the option positions, their common stock position relative to their AUM (as found in their SEC ADV) is sizeable enough to make sure that SHLD should speed up the process a bit.

[Guest wellmont]

It wouldn't be important as a standalone argument. But I can imagine that if you are highly concentrated concentrated in out-of-the-money call options with a certain expiration date of that magnitude relative to your fund that you will pull all rabbits out of the hat to make this investment work. Their presentation was the reason why the stock ran from the low $40s to $65. Given the redemptions at ESL, Eddie Lampert doesn't have luxury of waiting around anymore that he had 5 years ago. Plus at a certain point, Berkowitz has to factor in the opportunity cost of waiting around for the liquidation to materalize. Therefore, I think for the first time in years that the need for drastic action is near, as all players have a fiduciary duty to their investors as well.

 

there is not a thing Baker can do to influence things. they are a minority shareholder. ESL works on his own timetable. baker is a big boy. you take a big risk you can make a big reward. but you can also lose.

[stahleyp]

Maybe it's my wishful thinking, but I don't think he'll stop sharing a good amount of his thoughts. He loves us after all! ;)

 

Yes Paul, you are correct! 

 

Out of all of the stocks available, I will probably refrain from commenting on ten of them at any given time.  That is not the end of the world.  Cheers!

 

You're the best, Sanj. Seriously, thanks for all that you do.

[valueyoda]

A going private consortium consisting of ESL, Fairholme and a few other large minority shareholders coupled with financing and equity injection from Blackstone would be interesting. However, I think that it is unlikely that Eddie wants to pursue that route. It would probably provide the cleanest and fastest way to deal with this company. It has been apparent for years that most investors in SHLD don't understand the company's complicated legal and financial facets, but still analyze SHLD as a tarnished retailer first on a consolidated basis. Therefore, it will be one of the most volatile battleground stocks until a clear plan is laid out.

[constructive]

Also are you guys figuring the nominal value of the calls when you say the position is critical to baker? how big is the call premium relative to their aum?

 

They had $148M AUM as of Q3. According to filings they own 6.2M shares of XRTX (was $69M, now $82M), 1.5M shares of SHLD (was $89M, now down to $55M) and 11.5M SHLD calls (value unknown). The math doesn't add up, so maybe they were using margin. The fund probably lost at least $30M / 20% in the past few weeks, could be a lot more.

[valueyoda]

It could be less, since they also own foreign positions that are not included in the filings, but painful nonetheless.

[T-bone1]

If you read the rest of the thread, or Baker Street's filings and look at open interest in the options, you will see that the majority of their position is a $60-$70 call spread expiring Jan 2015.  I believe they added more expiring in 2016 and they own a not-insignificant amount of stock.

 

All US exchange traded options are American-style and are always "excercizeable withing 60 days" or tommorow for that matter.

 

If you want to speculate on something non-business related that might effect the stock price, add up the value of all of the non SHLD stock Eddy has sold this year personally (I assume he isn't levered and is now sitting on this cash), take a guess at how much of ESL may still be redeemed, look at what happened in January 2012 and then we can all endlessly speculate about whether or not Eddy is about to buy a bunch of SHLD personally.

[valueyoda]

I was thinking exactly the same! He sold a nice chunk of Autonation recently. And he might have sold more Autozone (even though he doesn't have to report it anymore).  If you want to apply second level thinking to the matter, you have to wonder why Eddie pre-announced the results now.