SHLDQ - Sears Holdings Corp

[adesigar]

Ben, I don't have a ton of additional thoughts.  On the G/N-G issue I would agree with you that N-G's can more easily be spun off, etc., if only because they aren't contractually committed as a guarantor and getting them released is probably borderline impossible (realistically speaking).  From a reporting standpoint, I would agree as well that the split is helpful to getting a handle on underlying economics.

 

On the bankruptcy remote issue, that is true.  If assets were legally separated and assuming no fraudulent conveyance or similar issues then of course the asset is presumably out of reach.  But that has nothing to do with something being bankruptcy remote.  The problem is that people seem to have taken a view that these terms have some kind of plain meaning.  So "bankruptcy remote" means "remote from a Sears hold co bankruptcy".  "Guarantor/Non-Guarantor" means "only guarantors are tied into the Sears hold co structure and non-guarantors are completely free from it".  Obviously these terms don't mean that.

 

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Feel free to confuse the Sears retail subsidiary with the Sears holding company to make your point.

[krazeenyc]

http://finance.yahoo.com/news/saving-sears-eddie-lamperts-complicated-185610982.html

 

This article makes an interesting point regarding some of the challenges or details that must be worked out for Sears to spin off a REIT -- some of these are focused on the ownership structure of the REIT.

[Kraven]

Ben, I don't have a ton of additional thoughts.  On the G/N-G issue I would agree with you that N-G's can more easily be spun off, etc., if only because they aren't contractually committed as a guarantor and getting them released is probably borderline impossible (realistically speaking).  From a reporting standpoint, I would agree as well that the split is helpful to getting a handle on underlying economics.

 

On the bankruptcy remote issue, that is true.  If assets were legally separated and assuming no fraudulent conveyance or similar issues then of course the asset is presumably out of reach.  But that has nothing to do with something being bankruptcy remote.  The problem is that people seem to have taken a view that these terms have some kind of plain meaning.  So "bankruptcy remote" means "remote from a Sears hold co bankruptcy".  "Guarantor/Non-Guarantor" means "only guarantors are tied into the Sears hold co structure and non-guarantors are completely free from it".  Obviously these terms don't mean that.

 

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Feel free to confuse the Sears retail subsidiary with the Sears holding company to make your point.

 

Son, I have no idea what you're babbling about.

[oddballstocks]

Ben, I don't have a ton of additional thoughts.  On the G/N-G issue I would agree with you that N-G's can more easily be spun off, etc., if only because they aren't contractually committed as a guarantor and getting them released is probably borderline impossible (realistically speaking).  From a reporting standpoint, I would agree as well that the split is helpful to getting a handle on underlying economics.

 

On the bankruptcy remote issue, that is true.  If assets were legally separated and assuming no fraudulent conveyance or similar issues then of course the asset is presumably out of reach.  But that has nothing to do with something being bankruptcy remote.  The problem is that people seem to have taken a view that these terms have some kind of plain meaning.  So "bankruptcy remote" means "remote from a Sears hold co bankruptcy".  "Guarantor/Non-Guarantor" means "only guarantors are tied into the Sears hold co structure and non-guarantors are completely free from it".  Obviously these terms don't mean that.

 

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Feel free to confuse the Sears retail subsidiary with the Sears holding company to make your point.

 

Reminds me of a certain quote by Lincoln...

[peridotcapital]

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Thanks Kraven.  Bonds (SRAC vs. 8% notes) are not trading anywhere near (relatively speaking) the rating difference, it's inverted.

 

Always an interesting situation.

 

Ben

 

This is why I was surprised that people were predicting (correctly so it turned out, at least in the short term for reason I don't understand) that the 2019 8% notes were going to trade at a much lower YTM than the 2017 SRAC debt.  The difference today (11% vs 18% YTM) makes no sense given the lower rating and longer maturity.

[ni-co]

http://finance.yahoo.com/news/saving-sears-eddie-lamperts-complicated-185610982.html

 

This article makes an interesting point regarding some of the challenges or details that must be worked out for Sears to spin off a REIT -- some of these are focused on the ownership structure of the REIT.

 

Thanks, interesting. I'm curious whether they are right about the $2.6bn figure. My guess is that it's going to be significantly higher. With regard to the legal issues I have the feeling that those are problems SHLD's lawyers might have thought of a few years ago… If any of them was a problem ESL wouldn't have announced the REIT rights offering.

[krazeenyc]

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Thanks Kraven.  Bonds (SRAC vs. 8% notes) are not trading anywhere near (relatively speaking) the rating difference, it's inverted.

 

Always an interesting situation.

 

Ben

 

This is why I was surprised that people were predicting (correctly so it turned out, at least in the short term for reason I don't understand) that the 2019 8% notes were going to trade at a much lower YTM than the 2017 SRAC debt.  The difference today (11% vs 18% YTM) makes no sense given the lower rating and longer maturity.

 

OK. I think this should be readily apparent. It's the same reason the warrants trade a bit higher than they should.

 

First, off I didn't get it at first when the rights were first trading. Like everyone else I tried to figure out value by adding what the notes were worth with what the warrants should trade for. Then I realized that it was an incorrect approach. The notes by themselves as well as the warrants by themselves are both worth less than the market price. However, together, they offer an interesting opportunity. 

 

Remember one key thing -- the notes can be redeemed at any time for full face value for the purpose of exercising the warrants you own. So IF you own both the rights and notes what you are really getting is a convertible note position or "super shares". I paid $170 per right -- so essentially I paid $670 for each note+ 17.6 warrants. So the way I look at it is I bought equity for $38.07 per share (when the equity in the market was $38) -- additionally my "super shares" give me all the upside of the equity plus, I get paid a 6% yield ($40/$670). Of course the misvaluation is nowhere near it was now -- these super shares cost roughly $45 per share now (despite shares costing $34-35 in the market) -- and yield only 5% annually.

[Luke 532]

This is why I was surprised that people were predicting (correctly so it turned out, at least in the short term for reason I don't understand) that the 2019 8% notes were going to trade at a much lower YTM than the 2017 SRAC debt.  The difference today (11% vs 18% YTM) makes no sense given the lower rating and longer maturity.

 

It's interesting price action for sure.  I sold all my bonds slightly below 87 over the past 5 or so trading days.  Looks like I left some money on the table.

[Luke 532]

Remember one key thing -- the notes can be redeemed at any time for full face value for the purpose of exercising the warrants you own.

 

Right, but that really won't be an advantage until we're within one year (probably even within six months) to expiration and a good chunk of the time value has worn off.  Unless, of course, the bonds trade down extremely low then it might make sense to use them to exercise the warrants prematurely (thus sacrificing any extrinsic value to the warrants).

[BTShine]

Remember one key thing -- the notes can be redeemed at any time for full face value for the purpose of exercising the warrants you own.

 

Right, but that really won't be an advantage until we're within one year (probably even within six months) to expiration and a good chunk of the time value has worn off.  Unless, of course, the bonds trade down extremely low then it might make sense to use them to exercise the warrants prematurely (thus sacrificing any extrinsic value to the warrants).

 

It's not necessarily an advantage, but it does provide a floor to the price of the bonds/warrants (albeit, this floor is dictated by the current share price). 

[krazeenyc]

Remember one key thing -- the notes can be redeemed at any time for full face value for the purpose of exercising the warrants you own.

 

Right, but that really won't be an advantage until we're within one year (probably even within six months) to expiration and a good chunk of the time value has worn off.  Unless, of course, the bonds trade down extremely low then it might make sense to use them to exercise the warrants prematurely (thus sacrificing any extrinsic value to the warrants).

 

I didn't mean that you would necessarily exercise -- I simply meant that owning the note + 17.6 warrants is just like owning 17.6 shares + a payment of $40 annually.  So this is almost like an equity position -- with a bit better downside protection. The valuation gap between the note + warrant combo should be in relation to just owning the equity has come in line with where it should be. I've pared. Prior to the closing of the warrant the price of straight equity was somehow the same price as owning what was essentially a different class of equity that paid a 6% + yield.

[dowfin1]

Finally, on the Moody's report, I quickly skimmed it.  All they are saying is that hold co debt since it doesn't have any sub guarantees is structurally subordinate to the sub debt and other obligations.  What that means is that even though a parent owns the equity in a sub, the sub's debts and obligations (absent some other contractual obligation with the parent, like a guarantee) will get paid first before there are any funds available to the parent.  So after those obligations are satisfied, there might not be anything left.

 

Thanks Kraven.  Bonds (SRAC vs. 8% notes) are not trading anywhere near (relatively speaking) the rating difference, it's inverted.

 

Always an interesting situation.

 

Ben

 

This is why I was surprised that people were predicting (correctly so it turned out, at least in the short term for reason I don't understand) that the 2019 8% notes were going to trade at a much lower YTM than the 2017 SRAC debt.  The difference today (11% vs 18% YTM) makes no sense given the lower rating and longer maturity.

 

Might be because the 8% SH bonds par value can be used as purchase currency for warrant exercise, and thus more retail interest.

[Picasso]

The inverted yield curve isn't that confusing. Distressed borrowers almost always have an inverted yield curve because they trade on a recovery of par value. You also can't compare the yield on the 2019 note to the other SRAC bonds. They sit on totally different parts of the capital structure. The notes also have Lampert with over 50% ownership.

 

The one thing we know for sure are the notes sit directly in front of the equity holders. With over $3.5 billion of market cap today I don't think it is surprising to see them within about 15% of par value.

 

I also think the rating agencies have it wrong on their credit coverage. This is such a small piece at $625 million that I highly doubt Sears will have a difficult time paying it back in 5 years in comparison to the rest of their asset base. This is the first senior unsecured on the holdco that we have been able to invest in. I've seen worse bonds rated much higher than single-C.

[heth247]

It's interesting price action for sure.  I sold all my bonds slightly below 87 over the past 5 or so trading days.  Looks like I left some money on the table.

 

Luke, how do you manage to sell your bonds?

[Luke 532]

It's interesting price action for sure.  I sold all my bonds slightly below 87 over the past 5 or so trading days.  Looks like I left some money on the table.

 

Luke, how do you manage to sell your bonds?

 

Multiple service reps at IB were wrong and the bonds were/are able to be traded.

[dowfin1]

The inverted yield curve isn't that confusing. Distressed borrowers almost always have an inverted yield curve because they trade on a recovery of par value. You also can't compare the yield on the 2019 note to the other SRAC bonds. They sit on totally different parts of the capital structure. The notes also have Lampert with over 50% ownership.

 

The one thing we know for sure are the notes sit directly in front of the equity holders. With over $3.5 billion of market cap today I don't think it is surprising to see them within about 15% of par value.

 

I also think the rating agencies have it wrong on their credit coverage. This is such a small piece at $625 million that I highly doubt Sears will have a difficult time paying it back in 5 years in comparison to the rest of their asset base. This is the first senior unsecured on the holdco that we have been able to invest in. I've seen worse bonds rated much higher than single-C.

 

Piccasso, do you know of any significant assets that would not be available to SCRA bondholders (regardless of creditor priority) whose bonds are guaranteed by Sears Roebuck?  I cannot envision a bkcy where the common gets any value before the SRAC creditors.

 

Thanks.

[Picasso]

The inverted yield curve isn't that confusing. Distressed borrowers almost always have an inverted yield curve because they trade on a recovery of par value. You also can't compare the yield on the 2019 note to the other SRAC bonds. They sit on totally different parts of the capital structure. The notes also have Lampert with over 50% ownership.

 

The one thing we know for sure are the notes sit directly in front of the equity holders. With over $3.5 billion of market cap today I don't think it is surprising to see them within about 15% of par value.

 

I also think the rating agencies have it wrong on their credit coverage. This is such a small piece at $625 million that I highly doubt Sears will have a difficult time paying it back in 5 years in comparison to the rest of their asset base. This is the first senior unsecured on the holdco that we have been able to invest in. I've seen worse bonds rated much higher than single-C.

 

Piccasso, do you know of any significant assets that would not be available to SCRA bondholders (regardless of creditor priority) whose bonds are guaranteed by Sears Roebuck?  I cannot envision a bkcy where the common gets any value before the SRAC creditors.

 

Thanks.

 

So far the common is pulling out value through spinoffs (Lands End) and rights offerings which is hurting those SRAC bond holders.  It is hard to know what the capital structure will look like in a few years if Sears goes through bankruptcy.  All else being equal to what is in place today, I wouldn't see a situation where the common stockholders end up with assets while the SRAC bondholders get screwed.  But it seems very likely to me that there will be changes made to weaken the position of the SRAC bonds before something like that could happen.  Before SRAC bonds could touch the holdco assets you have the 2018 2nd lien note, the pension liability and the 2019 notes.  Who knows what might add to that list in a few years.

 

I was speaking with a restructuring lawyer about the 2019 notes yesterday and he made a good point. ESL owns over 50% of the notes from the rights offering but has a much bigger financial interest in the equity position due to the size.  In a way ESL can be lax on a breach of covenants or priority of payments because he controls the chunk of the capital structure that sits in front of his equity.  Not saying he would but something to keep in mind.  I still like the value of those notes if they start offering back in the low 80's.

[ScottHall]

As I recall, the SRACs have no guarantee by Holdings... just Sears, Roebuck. It's been a while since I looked at this, though.

[dowfin1]

The inverted yield curve isn't that confusing. Distressed borrowers almost always have an inverted yield curve because they trade on a recovery of par value. You also can't compare the yield on the 2019 note to the other SRAC bonds. They sit on totally different parts of the capital structure. The notes also have Lampert with over 50% ownership.

 

The one thing we know for sure are the notes sit directly in front of the equity holders. With over $3.5 billion of market cap today I don't think it is surprising to see them within about 15% of par value.

 

I also think the rating agencies have it wrong on their credit coverage. This is such a small piece at $625 million that I highly doubt Sears will have a difficult time paying it back in 5 years in comparison to the rest of their asset base. This is the first senior unsecured on the holdco that we have been able to invest in. I've seen worse bonds rated much higher than single-C.

 

Piccasso, do you know of any significant assets that would not be available to SCRA bondholders (regardless of creditor priority) whose bonds are guaranteed by Sears Roebuck?  I cannot envision a bkcy where the common gets any value before the SRAC creditors.

 

Thanks.

 

So far the common is pulling out value through spinoffs (Lands End) and rights offerings which is hurting those SRAC bond holders.  It is hard to know what the capital structure will look like in a few years if Sears goes through bankruptcy.  All else being equal to what is in place today, I wouldn't see a situation where the common stockholders end up with assets while the SRAC bondholders get screwed.  But it seems very likely to me that there will be changes made to weaken the position of the SRAC bonds before something like that could happen.  Before SRAC bonds could touch the holdco assets you have the 2018 2nd lien note, the pension liability and the 2019 notes.  Who knows what might add to that list in a few years.

 

I was speaking with a restructuring lawyer about the 2019 notes yesterday and he made a good point. ESL owns over 50% of the notes from the rights offering but has a much bigger financial interest in the equity position due to the size.  In a way ESL can be lax on a breach of covenants or priority of payments because he controls the chunk of the capital structure that sits in front of his equity.  Not saying he would but something to keep in mind.  I still like the value of those notes if they start offering back in the low 80's.

 

From the perspective of a SRAC  bond holder, its good that Lampert could make moves as in his capacity as SH creditor to protect his common, which is why I am intrigued by the idea of trading the SH notes for SRAC bonds having a shorter maturity. 

[Picasso]

You would have to account for the long legal battle for the assets held at the holdco if you own the SRAC bonds in bankruptcy.  Your views probably match up with the big drop in CDS spreads but the story changes so quickly who knows what this will look like in 2016 or 2017.

 

The 2019 notes seem easiest to understand the risk on.  It becomes murkier as time goes by and you go down the capital structure.

[valueinvestor82]

Pardon me if this was discussed somewhere recently in the sea of SHLD conversation, but what about the possibility that the REIT itself ends up with some of the debt that everyone keeps talking about, and uses lease income to service them in a way that the risk is deemed less?

[dowfin1]

Pardon me if this was discussed somewhere recently in the sea of SHLD conversation, but what about the possibility that the REIT itself ends up with some of the debt that everyone keeps talking about, and uses lease income to service them in a way that the risk is deemed less?

 

The deal is described as a cash infusion to SHLD from new mortgage debt and new shareholder cash.  The question is whether Lambert uses the cash to retire/service old debt or burn it in losses:

 

"In particular, the Company is actively exploring the monetization of a portion of its owned real estate portfolio (potentially in the range of 200-300 stores), through a sale-leaseback transaction, with the selected stores to be sold to a newly-formed real estate investment trust (“REIT”). The Company would continue to operate in the store locations sold to the REIT under one or more master leases. In the event such sale-leaseback transaction were to occur, the Company would realize substantial proceeds from such sale, which would further enhance its liquidity. Additionally, if the Company determines to pursue such a sale-leaseback transaction, the Company expects to distribute to its shareholders, on a pro rata basis, rights to purchase shares of common stock or other equity interests of the REIT, funding a portion of the purchase price for the stores from the subscription proceeds of such shares or interests, with the balance from mortgage or other debt financing."

 

 

 

 

[texual]

Sears, a real estate behemoth in retailer's clothing, remains our proverbial beach ball held under water. Based on our latest estimates of underlying asset values, our research suggests that this may be a good long-term holding.

 

just picked this up from the bottom of one of the new fairholme website pages. thought it was cool.

[CorpRaider]

Not exactly emphatic is it.  Wow his new site is disturbingly slick for a value investor, especially with mostly closed funds.

[oddballstocks]

Not exactly emphatic is it.  Wow his new site is disturbingly slick for a value investor, especially with mostly closed funds.

 

If you think that's bad have you seen the building he's putting together in Miami? http://www.miamiherald.com/news/local/community/miami-dade/midtown/article2684594.html

 

The Miami news is saying the tower is flashy even for Miami, that says something right there.  It will include a private art museum to house his collection.