SHLDQ - Sears Holdings Corp

[Guest wellmont]

I noticed my srac bonds have dropped about 25% in the last week. happy holidays!

[thepupil]

I noticed my srac bonds have dropped about 25% in the last week. happy holidays!

 

eddie should tender for them at a discount and then contribute them to the pension! would increase equity by buying in the debt at a discount and send interest payments that are already going outside the company to you to the pension instead. I'm sure he can't do this because of ERISA laws but it would be cool and would help out everyone (except those expecting to be paid off in full on the bonds)

[heth247]

One reason I like SHLD is many of the liabilities are of a depleting nature, while many of the assets are not, namely the trophy real estate in crowded, booming A malls.

 

The pension is 100 bps of change in discount rate and $1B more of contributions away from being completely gone. That pension is not worth a -500MM/year every year in perpetuity. I know I'm stating the obvious there, but I see many (not anyone here, not Chad) extrapolating cash burn from what amount to cash flows resembling principal payments on depleting liabilities, rather than interest.

 

Thepupil, if the long-term interest decrease again in the future, will their pension obligation come back and bite again?

[Guest wellmont]

I noticed my srac bonds have dropped about 25% in the last week. happy holidays!

 

eddie should tender for them at a discount and then contribute them to the pension! would increase equity by buying in the debt at a discount and send interest payments that are already going outside the company to you to the pension instead. I'm sure he can't do this because of ERISA laws but it would be cool and would help out everyone (except those expecting to be paid off in full on the bonds)

 

he should do a lot of things. but he doesn't. :)

[thepupil]

haha, true wellmont.

 

heth, the pension consists of two components: its assets (stocks and bonds) and it's liabilities (a discounted present value of its future outlays).

 

At end of Q2 there were 3.2B of assets and the liability was 4.8B using a 4.75% discount rate, for an unfunded balance of $1.6B.

 

Every 100 bps increases/decreases the liability by ~$600MM, so if the discount rate went to 3.75% and assets stayed the same the unfunded balance would balloon to $2.2B.

 

If rates rise slowly and stock and bond markets are relatively benign, it is quite plausible that the unfunded balance dwindles to a small amount and  necessary cash contributions decrease dramatically. If the pension gets in good enough shape, Sears could offload it to Metlife or someone like that for a fee and be done with it. Or you could see more settlements like in 2012.

 

There are lot of negative and positive possibilities. If I was a Sears pensioner, I wouldn't be concerned; a lot of progress has been made.

 

*edit: my idea to tender for the SRACs and contribute them to the pension would increase assets at the pension fund (helps pensionholders) and take the cash flows that are going to bond holders and make them "stealth pension contributions", which would increase the credit profile for SHLD HoldCo notes as well. It obviously also helps equity holders. There's a lot of room between the trading price of the SRACs (55 cents on the dollar) and par to come to some reasonable price such that SRAC holders like Wellmont don't feel bamboozled. And to be clear, this isn't to load up the pension with crap bonds, its to bolster it with an additional supplementary high returning asset.

[Guest wellmont]

the srac debt is trading at 40c on the dollar. :)

[thepupil]

Not according to IB, what broker/mark are you using?

[heth247]

haha, true wellmont.

 

heth, the pension consists of two components: its assets (stocks and bonds) and it's liabilities (a discounted present value of its future outlays).

 

At end of Q2 there were 3.2B of assets and the liability was 4.8B using a 4.75% discount rate, for an unfunded balance of $1.6B.

 

Every 100 bps increases/decreases the liability by ~$600MM, so if the discount rate went to 3.75% and assets stayed the same the unfunded balance would balloon to $2.2B.

 

If rates rise slowly and stock and bond markets are relatively benign, it is quite plausible that the unfunded balance dwindles to a small amount and  necessary cash contributions decrease dramatically. If the pension gets in good enough shape, Sears could offload it to Metlife or someone like that for a fee and be done with it. Or you could see more settlements like in 2012.

 

There are lot of negative and positive possibilities. If I was a Sears pensioner, I wouldn't be concerned; a lot of progress has been made.

 

*edit: my idea to tender for the SRACs and contribute them to the pension would increase assets at the pension fund (helps pensionholders) and take the cash flows that are going to bond holders and make them "stealth pension contributions", which would increase the credit profile for SHLD HoldCo notes as well. It obviously also helps equity holders. There's a lot of room between the trading price of the SRACs (55 cents on the dollar) and par to come to some reasonable price such that SRAC holders like Wellmont don't feel bamboozled. And to be clear, this isn't to load up the pension with crap bonds, its to bolster it with an additional supplementary high returning asset.

 

Thanks for your explanation. I thought you once mentioned the idea that Eddie could spin off enough good assets to equity holders and then let Sears retail go bankrupt. Wouldn't that make SRAC default? Why would he tender it for now?

[thepupil]

first of all let me be clear, i am by no means an expert on this stuff and am just throwing out hypotheticals, playing armchair CEO/owner operator.

 

I mentioned that the credit profile of SHLD was weakening, that a bankruptcy was possible and that assets were being stripped away from SHLD to equity holders. I was just saying that's not the type of situation I would go into as a lender trying to make 8.5% YTM ( the better, holdco SHLD bonds have traded down slightly since and are higher YTM). If you noticed, Moody's mentioned these would possibly be downgraded after LE spinoff details.

 

I have no real opinion on what eddie should do with the SRAC bonds or what exactly would happen in a bankruptcy. I was just pointing out that right now a liability is trading at 55 cents on the dollar and yields a lot and has a lot of duration. Sears is paying the coupon on that. Why shouldn't the pension (which has the strongest claim on all assets) be getting those yieldy cash flows; take the SRAC bondholders out of the picture! Of course, as you point out, if these end up worthless, my idea is stupid.

 

it is more of a hypothetical and cool thought. It probably isn't practical.

[Guest wellmont]

Not according to IB, what broker/mark are you using?

 

tda. and SSRAP which is an exchange traded vehicle that holds ssrac debt, is trading at $10.25.

[thepupil]

is that a dealer quote wellmont? what's the cusip? where can i buy them at 40 cents?

 

i see  them as 55 X 58 market on IB. Specifically the 6 1/2's of 2028 and the 7's of 2032.

 

 

So the exchange traded vehicle is trading at a substantial discount to the SSRAC debt? interesting!

[Guest wellmont]

I hold some straight ssrac debt (formerly exchange traded) in my tda account that is marked down to $10. perhaps you are in for a holiday surprise?

 

Sears Roebuck Acceptance Corp., 7.00% Notes due 7/15/2042

Sears Roebuck Acceptance Corp., 7.40% Notes due 2/1/2043

[thepupil]

I don't own any SRAC debt. the screenshot I posted was what I see as the SRAC debt on IB. I enter in the ticker SHLD and select Sears Roebuck Acceptance corp and it shows me the below bonds. what is the disconnect between my marks and markets and your 40 cents and 10 cents quotes. None of these trade for 10 cents on the dollar. They'd be yielding like 70%. If they actually do trade there, please direct me to where i can buy them.

 

From what I can tell the SSRAP owns the 7% of 6/2032 and trades (in a very limited fashion, only 150 shares today) for 40 cents, a nice discount to the underlying which i see as 55/58 market.

 

Are the prices you are putting out there real transactable markets like they are on IB or is your broker just giving you shitty marks?

 

Or am i looking at the wrong bonds? what cusips do you own and where do they trade and what markets are you being quoted?

 

  the market for the bonds is

                              Bid / Offer

6 7/8 of 10/2015    86 / 89

7.5% of 10/2027    60 / 64

6 3/4%  1/2028      55 /58

6.5% of 12/2028    53 / 58

7.0% of 6/2032      53 / 58

 

 

 

812404AY7 19971008 6.87520171015 Yes

812404AX9 19970930 7.5 20271015 No

812404AZ4 19980113 6.75 20280115 Yes

812404BE0 19981124 6.5 20281201 Yes

812404BK6 20020529 7.0 20320601 Yes

[thepupil]

weird, IB doesn't seem to have 2042's and 2043's and i can't transact in the SATURNs.

[Guest wellmont]

maybe I just have a temporary mark on some outlier trades. will monitor. ssrap is back over $12.

[heth247]

first of all let me be clear, i am by no means an expert on this stuff and am just throwing out hypotheticals, playing armchair CEO/owner operator.

 

I mentioned that the credit profile of SHLD was weakening, that a bankruptcy was possible and that assets were being stripped away from SHLD to equity holders. I was just saying that's not the type of situation I would go into as a lender trying to make 8.5% YTM ( the better, holdco SHLD bonds have traded down slightly since and are higher YTM). If you noticed, Moody's mentioned these would possibly be downgraded after LE spinoff details.

 

I have no real opinion on what eddie should do with the SRAC bonds or what exactly would happen in a bankruptcy. I was just pointing out that right now a liability is trading at 55 cents on the dollar and yields a lot and has a lot of duration. Sears is paying the coupon on that. Why shouldn't the pension (which has the strongest claim on all assets) be getting those yieldy cash flows; take the SRAC bondholders out of the picture! Of course, as you point out, if these end up worthless, my idea is stupid.

 

it is more of a hypothetical and cool thought. It probably isn't practical.

 

Understood. Just want to understand all possibilities and their implications.

[peridotcapital]

Interesting tidbit on the SRAC debt: Did you know Eddie owns $1M worth personally?

 

From the 10-K:

 

Senior Secured Notes

 

In 2011, Mr. Lampert and ESL purchased an aggregate of $95 million of principal amount of the Company’s 6 5/8% Senior Secured Notes due 2018 (the " 6 5 / 8% Notes") and $10 million of principal amount of unsecured notes issued by SRAC and another indirect wholly owned subsidiary of Sears Holdings, Sears DC Corp. (the “Subsidiary Notes”). At February 2, 2013 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $1 million and $2 million , respectively, of principal amount of Subsidiary Notes. At January 28, 2012 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $4 million and $10 million , respectively, of principal amount of Subsidiary Notes.

[heth247]

Interesting tidbit on the SRAC debt: Did you know Eddie owns $1M worth personally?

 

From the 10-K:

 

Senior Secured Notes

 

In 2011, Mr. Lampert and ESL purchased an aggregate of $95 million of principal amount of the Company’s 6 5/8% Senior Secured Notes due 2018 (the " 6 5 / 8% Notes") and $10 million of principal amount of unsecured notes issued by SRAC and another indirect wholly owned subsidiary of Sears Holdings, Sears DC Corp. (the “Subsidiary Notes”). At February 2, 2013 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $1 million and $2 million , respectively, of principal amount of Subsidiary Notes. At January 28, 2012 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $4 million and $10 million , respectively, of principal amount of Subsidiary Notes.

 

But this does indicate that over the period of 2012/2 to 2013/2, Eddie reduced his holdings of SRAC sub notes from 4MM to 1MM, and ESL reduced from 10MM to 2MM, right?

[peridotcapital]

Interesting tidbit on the SRAC debt: Did you know Eddie owns $1M worth personally?

 

From the 10-K:

 

Senior Secured Notes

 

In 2011, Mr. Lampert and ESL purchased an aggregate of $95 million of principal amount of the Company’s 6 5/8% Senior Secured Notes due 2018 (the " 6 5 / 8% Notes") and $10 million of principal amount of unsecured notes issued by SRAC and another indirect wholly owned subsidiary of Sears Holdings, Sears DC Corp. (the “Subsidiary Notes”). At February 2, 2013 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $1 million and $2 million , respectively, of principal amount of Subsidiary Notes. At January 28, 2012 , Mr. Lampert and ESL held an aggregate of $95 million of principal amount of 6 5 / 8% Notes and $4 million and $10 million , respectively, of principal amount of Subsidiary Notes.

 

But this does indicate that over the period of 2012/2 to 2013/2, Eddie reduced his holdings of SRAC sub notes from 4MM to 1MM, and ESL reduced from 10MM to 2MM, right?

 

Yes, I'm sure he was opportunistically buying when the stock fell hard in 2011 and sold most when the stock (and presumably the debt) rallied back.

 

Definitely something to watch though. He won't dare bankrupt SRAC as long as the latest disclosures shows him owning its debt personally... selling it between 10K's without a disclosure and then forcing it to default would open him up to a big lawsuit...

[heth247]

Yes, I'm sure he was opportunistically buying when the stock fell hard in 2011 and sold most when the stock (and presumably the debt) rallied back.

 

Definitely something to watch though. He won't dare bankrupt SRAC as long as the latest disclosures shows him owning its debt personally... selling it between 10K's without a disclosure and then forcing it to default would open him up to a big lawsuit...

 

I agree that it does not make sense default SRAC for now. But if has been 10 months since Feb, so he certainly could have already sold those remaining notes without disclosure, could he not?  Or, he could have bought more since it is 55c on a dollar....  Does SEC require disclosure for such transaction?

 

 

[peridotcapital]

Yes, I'm sure he was opportunistically buying when the stock fell hard in 2011 and sold most when the stock (and presumably the debt) rallied back.

 

Definitely something to watch though. He won't dare bankrupt SRAC as long as the latest disclosures shows him owning its debt personally... selling it between 10K's without a disclosure and then forcing it to default would open him up to a big lawsuit...

 

I agree that it does not make sense default SRAC for now. But if has been 10 months since Feb, so he certainly could have already sold those remaining notes without disclosure, could he not?  Or, he could have bought more since it is 55c on a dollar....  Does SEC require disclosure for such transaction?

 

No, he'll update the 10K every year and that's it. And we don't know which SRAC debt owns either. The longer term debt trades at distressed priced, but the 2017 debt trades around 90 cents (FD: I own the latter).

[thepupil]

Wellmont, I found your long SRACs! And dug deeper into the SRACs generally to learn some more.  The longer maturities  (2042 + 2043) are also called preferred stock under bloomberg nomenclature and don't show up on IB for some reason. The 7.4% coup 7.0% coups do seem to trade around 40 cents on the dollar  ($10 / $25) so they offer 17+% yields (can you confirm the coupon payments?).

 

Interestingly, they are callable on 1/10/2014, so if they got called you'd see quite the appreciation in these bad boys. It would not cost the company must since there are is only 90MM par value of  bonds left, but obviously it's in the best interest of the company to just buy them back at a discount. That would be the ultimate odd lot tender!

 

More interestingly, these are almost gone. If you look on the BB screen shot, there used to be 10MM outstanding and there are only 1.8MM now. They are being tendered for already. there used t be 250MM par value in each of the 2042 and 2043 classes.  It looks like par value of the other SRACs has been diminished as well (all the issue sizes are odd numbers and below 50MM) .

 

I did not realize that Eddie was already buying these back. I always thought they traded at such low $ prices and high yields because the market was saying they don't have any real rights and that they would be worthless in a BK, but that thinking could be misguided if SHLD deems it worthwhile to buy these back. 

 

Anyone besides Wellmont own these? With all the liquidity coming in to SHLD, maybe the SRACs will be gone soon. It's only 330MM in a big cap structure so it is not really consequential in the big picture, I guess. But it could be consequential for those who own them.

[peridotcapital]

Wellmont, I found your long SRACs! And dug deeper into the SRACs generally to learn some more.  The longer maturities  (2042 + 2043) are also called preferred stock under bloomberg nomenclature and don't show up on IB for some reason. The 7.4% coup 7.0% coups do seem to trade around 40 cents on the dollar  ($10 / $25) so they offer 17+% yields (can you confirm the coupon payments?).

 

Interestingly, they are callable on 1/10/2014, so if they got called you'd see quite the appreciation in these bad boys. It would not cost the company must since there are is only 90MM par value of  bonds left, but obviously it's in the best interest of the company to just buy them back at a discount. That would be the ultimate odd lot tender!

 

More interestingly, these are almost gone. If you look on the BB screen shot, there used to be 10MM outstanding and there are only 1.8MM now. They are being tendered for already. there used t be 250MM par value in each of the 2042 and 2043 classes.  It looks like par value of the other SRACs has been diminished as well (all the issue sizes are odd numbers and below 50MM) .

 

I did not realize that Eddie was already buying these back. I always thought they traded at such low $ prices and high yields because the market was saying they don't have any real rights and that they would be worthless in a BK, but that thinking could be misguided if SHLD deems it worthwhile to buy these back. 

 

Anyone besides Wellmont own these? With all the liquidity coming in to SHLD, maybe the SRACs will be gone soon. It's only 330MM in a big cap structure so it is not really consequential in the big picture, I guess. But it could be consequential for those who own them.

 

I don't see him redeeming them early. Right now every dollar of cash is precious so the upside for him to do that is minimal. Now, if 24 months from now SHLD is miraculously free cash flow positive and can issue long term debt at lower rates than 7% as a result, then refinancing them early could make a lot of sense. But that seems to be a long shot.

[thepupil]

obviously a long shot (it'd be a 150% return in a month lol) but what i don't understand is how he is able to buy these back and reduce the size of the amount outstanding and destroy liquidity for holders?

 

I never looked at these closely, had never noticed they all used to be bigger issue sizes. i'm sure if i went through the 10-k's with more carefulness i'd see them getting smaller every year.

[Guest wellmont]

here's my rationale for why he won't ever bk srac. if he bk srac, what is the media going to say? it's going to say that Sears is going bk. that's what the media does. they won't make the distinction that it's only a sub of a holding company. they will say sears is filing for chapter 11. the amount of pr damage that this would do to esl and the holding company is massive in comparison to what he would gain by putting it in bk. that may be a naive view, but it's my naive view. :)