SHLDQ - Sears Holdings Corp

[ERICOPOLY]

In an alternate fantasy world...

 

He could do a sale-leaseback of the properties and dividend out all the sale proceeds.  The remaining entity would then have some mega-problems as the new lease obligations would be a sudden death blow.  Then he could let the creditors take over the failing retail operations, liquidate what's left, etc...

 

Somebody else is then the bad guy.  Lampert didn't fire them, he just exposed the retail operations for what they really are at this point -- just a private sector welfare program to keep people in their jobs.

 

[krazeenyc]

In an alternate fantasy world...

 

He could do a sale-leaseback of the properties and dividend out all the sale proceeds.  The remaining entity would then have some mega-problems as the new lease obligations would be a sudden death blow.  Then he could let the creditors take over the failing retail operations, liquidate what's left, etc...

 

Somebody else is then the bad guy.  Lampert didn't fire them, he just exposed the retail operations for what they really are at this point -- just a private sector welfare program to keep people in their jobs.

 

You're right to some degree. Sears doesn't have the kind of business than can support 100k sq ft stores (a lot of the top properties are 200-300k sq ft). Even though Sears has a great advantage in cost of occupancy (rent), they have no advantage in other costs such as utilities and labor.  I don't believe the sales they have are being driven by the size of their stores (ie I don't think they'd lose too much profitable sales if the stores on average were 40k sq ft instead of 100k).  I would further assume that with 40k sq ft stores the sales they would lose would be the lowest margin sales.  How long it takes for Sears to have an average store size of 40k sq ft with 60k sq ft leased out to 3rd parties -- the faster the better.

 

As for the owned vs leased stores -- I would focus more on the quality of the location. I've found in researching the leases that they are absurdly in Sears' advantage and are basically owned properties.  There are some quirky issues sometimes with some of the leased Kmarts for example timing a third party lease with Kmart's many 5 year extensions -- it doesn't always work out easily. 

[Parsad]

Note that the company’s legacy pension obligation is essentially a form of debt and has influenced revolver usage. The $1.1 billion of contributions made in the last 10 quarters have been funded by revolver borrowings. On a pro forma basis, the revolver balance would be $339 million absent these contributions. We have used one form of debt, being the revolver, to fund another form of debt, the pension. Since 2012, about $1.1 billion of the second quarter revolver balance of $1.4 billion was driven by pension contributions which should be distinguished from funding operating expenses.

 

http://searsholdings.com/invest/docs/2014_Q2_Call_transcript.pdf

 

Can Eddie take money out of the pension plan to pay down the revolver?  Cheers!

 

Yes if interest rates go back up the pension could become overfunded in which case he can.  He can sell the pension plan to an insurance company.

 

But if interest rates stay the same for 3 months, six months, a year, two years or five years, then he can't, correct?  And if the pension plan remains underfunded, how much would it be worth to an insurance company?

 

I'm just pointing out what a crock of shit the management was trying to feed investors on that conference call.  Cash is cash...debt is debt...and pensions are not simply another form of debt. 

 

If you borrow from your personal line of credit and put it into your Roth/RRSP, you can withdraw it from your Roth/RRSP, regardless of interest rates and pay down the debt.  This is not the same thing with a company-funded pension plan.  Cheers!

 

This is really fuzzy thinking. You confuse losing liquidity with burning money.

 

1. If he took the money from the revolver and paid back bondholders, how would he get the money back from them to pay down the revolver?

2. Would you consider this money "burned" because he can't get it back?

 

No, I think you're using the same argument that many use to support EBITDA.  As if ordinary expenses in the course of business, be it one-time or continuous, don't matter.  When the cash is gone, it's gone!  Whether he pays the pension plan or bondholders, there is less liquidity available to support the existing businesses which are running losses.  Cheers!

[ni-co]

Note that the company’s legacy pension obligation is essentially a form of debt and has influenced revolver usage. The $1.1 billion of contributions made in the last 10 quarters have been funded by revolver borrowings. On a pro forma basis, the revolver balance would be $339 million absent these contributions. We have used one form of debt, being the revolver, to fund another form of debt, the pension. Since 2012, about $1.1 billion of the second quarter revolver balance of $1.4 billion was driven by pension contributions which should be distinguished from funding operating expenses.

 

http://searsholdings.com/invest/docs/2014_Q2_Call_transcript.pdf

 

Can Eddie take money out of the pension plan to pay down the revolver?  Cheers!

 

Yes if interest rates go back up the pension could become overfunded in which case he can.  He can sell the pension plan to an insurance company.

 

But if interest rates stay the same for 3 months, six months, a year, two years or five years, then he can't, correct?  And if the pension plan remains underfunded, how much would it be worth to an insurance company?

 

I'm just pointing out what a crock of shit the management was trying to feed investors on that conference call.  Cash is cash...debt is debt...and pensions are not simply another form of debt. 

 

If you borrow from your personal line of credit and put it into your Roth/RRSP, you can withdraw it from your Roth/RRSP, regardless of interest rates and pay down the debt.  This is not the same thing with a company-funded pension plan.  Cheers!

 

This is really fuzzy thinking. You confuse losing liquidity with burning money.

 

1. If he took the money from the revolver and paid back bondholders, how would he get the money back from them to pay down the revolver?

2. Would you consider this money "burned" because he can't get it back?

 

No, I think you're using the same argument that many use to support EBITDA.  As if ordinary expenses in the course of business, be it one-time or continuous, don't matter.  When the cash is gone, it's gone!  Whether he pays the pension plan or bondholders, there is less liquidity available to support the existing businesses which are running losses.  Cheers!

 

I think we are cross-talking. I don't understand "burning cash" as losing liquidity, but as permanent impairment of asset values. I have never argued that SHLD is losing liquidity by paying down the pension liability – there is no question about it. What I argue is: losing liquidity per se doesn't impair your NAV. Liquidity is not my primary concern with regard to SHLD, because SHLD could raise liquidity anytime by borrowing against the vast unencumbered RE.

 

What interests me is: Does paying down pension liabilities impair the net asset value of SHLD? And it doesn't! SHLD's NAV is unencumbered by it.

 

Assume you have 100K in cash and a house worth 500K with a 100K mortgage on it. So, your net worth is 500K. Now, you take your cash and pay down the mortgage with it. Has your net worth changed? Have you suddenly "burned" 100K? No! Your net worth is still 500K! "Paying down the mortgage" is exactly what ESL is doing by paying down pension liabilities. He's simply shifting money from one account into another. And therefore it's simply wrong to say that SHLD is "burning cash" by funding its pension liabilities. 

 

[texual]

Make no mistake, the Sears story continues.

[ERICOPOLY]

Assume you have 100K in cash and a house worth 500K with a 100K mortgage on it. So, your net worth is 500K. Now, you take your cash and pay down the mortgage with it. Has your net worth changed? Have you suddenly "burned" 100K? No! Your net worth is still 500K! "Paying down the mortgage" is exactly what ESL is doing by paying down pension liabilities. He's simply shifting money from one account into another. And therefore it's simply wrong to say that SHLD is "burning cash" by funding its pension liabilities.

 

I understand how to get the money back out of the house (cash-out refinance or just sell it)... but how do you get the money back out of the pension plan?  It feels like a sunk cost because the pension will be paid out to pensioners. 

 

My understanding is that low interest rates mean the pension can't earn it's own way to future solvency, which means it has to come out of shareholders' pockets instead.  I guess you can make assumptions about interest rates going higher and therefore you're getting it back at some point.  But some of it is gone for good since the low interest rates mean that literally the pension plan is earning less, and the shortfall must come from shareholders.

 

[merkhet]

Assume you have 100K in cash and a house worth 500K with a 100K mortgage on it. So, your net worth is 500K. Now, you take your cash and pay down the mortgage with it. Has your net worth changed? Have you suddenly "burned" 100K? No! Your net worth is still 500K! "Paying down the mortgage" is exactly what ESL is doing by paying down pension liabilities. He's simply shifting money from one account into another. And therefore it's simply wrong to say that SHLD is "burning cash" by funding its pension liabilities.

 

I understand how to get the money back out of the house (cash-out refinance or just sell it)... but how do you get the money back out of the pension plan?  It feels like a sunk cost because the pension will be paid out to pensioners. 

 

It's actually rather difficult to get money out of an over-funded pension plan because of various changes made in the wake of LBOs/raiders in the 80s and 90s. That said, we aren't exactly close to being over-funded...

[ni-co]

Assume you have 100K in cash and a house worth 500K with a 100K mortgage on it. So, your net worth is 500K. Now, you take your cash and pay down the mortgage with it. Has your net worth changed? Have you suddenly "burned" 100K? No! Your net worth is still 500K! "Paying down the mortgage" is exactly what ESL is doing by paying down pension liabilities. He's simply shifting money from one account into another. And therefore it's simply wrong to say that SHLD is "burning cash" by funding its pension liabilities.

 

I understand how to get the money back out of the house (cash-out refinance or just sell it)... but how do you get the money back out of the pension plan?  It feels like a sunk cost because the pension will be paid out to pensioners. 

 

What does it matter that you can't reinstate the liability once you paid it down? This is only a matter of liquidity – and liquidity is not the problem at SHLD. What matters for me is NAV and that this liability is gone at the end. Wouldn't you agree that, all things being the same, SHLD without a pension liability is worth more than with a pension liability? If pensioners waived their rights tomorrow, wouldn't the stock go up? There is value in paying down this pension liability – it's simply a balance sheet contraction. You can liken it to paying down a deferred tax liability. Leaving aside the problem of overfunding the pension plan at the end, I really don't understand why it should be important to be able to reverse the money flow. All you'd achieve is adding back the pension liability to your balance sheet.

 

It's actually rather difficult to get money out of an over-funded pension plan because of various changes made in the wake of LBOs/raiders in the 80s and 90s. That said, we aren't exactly close to being over-funded...

 

Yeah. I know – but it's possible. As far as I understand it to get the money out of an overfunded plan you'd essentially have to merge it with another, underfunded plan.

[ERICOPOLY]

I really don't understand why it should be important to be able to reverse the money flow. All you'd achieve is adding back the pension liability to your balance sheet.

 

I think I misunderstood your reason for using mortgage as your analogy.  A mortgage can be paid off, but the funds are there to bring back as liquidity if needed (unless price of house drops).  So I thought you were inferring that the pension worked like a mortgage... in which case I had to guess that you were suggesting that if rates skyrocketed back to some normalized interest rate level, it would become overfunded and the cash could then be brought back.  Something like that.

 

But I suppose, based on your reply, that is not the reason why you compared it to a mortgage.

[Parsad]

Assume you have 100K in cash and a house worth 500K with a 100K mortgage on it. So, your net worth is 500K. Now, you take your cash and pay down the mortgage with it. Has your net worth changed? Have you suddenly "burned" 100K? No! Your net worth is still 500K! "Paying down the mortgage" is exactly what ESL is doing by paying down pension liabilities. He's simply shifting money from one account into another. And therefore it's simply wrong to say that SHLD is "burning cash" by funding its pension liabilities.

 

That's not what they are doing...and that's my point. 

 

The correct example would be that the house is worth $500K, has an existing $200K mortgage, an existing $100K line of credit, and a $100K lien on the house by the subcontractor.  They added another $100K to the line of credit to pay the $100K lien on the house...not pay down the mortgage! 

 

So while the home value has not changed on the financial statement, that is $100K out of the homeowner's pocket unless the subcontractor decides there was some excess funds returnable to the homeowner.  Cheers!

 

[merkhet]

I think what people are saying is that the form of the liability is immaterial. In your example, they would owe the lien anyway. Does it matter if their liability is a lien or debt if the amount stays the same? It's not 100K out of the homeowner's pocket. It was never his to begin with...

[Parsad]

I think what people are saying is that the form of the liability is immaterial. In your example, they would owe the lien anyway. Does it matter if their liability is a lien or debt if the amount stays the same? It's not 100K out of the homeowner's pocket. It was never his to begin with...

 

LOL!  It's not the same.  You cannot get the money out when you need it, whereas if you paid off actual debt, you could re-borrow that money or issue new debt. 

 

How hard is this for people to understand?  Paying the pension from borrowed funds is not the same as paying off debt (notes, preferreds, convertible debt, debentures, lines of credit, revolvers, etc) in terms of liquidity for the company.  Cheers!

[ni-co]

I really don't understand why it should be important to be able to reverse the money flow. All you'd achieve is adding back the pension liability to your balance sheet.

 

I think I misunderstood your reason for using mortgage as your analogy.  A mortgage can be paid off, but the funds are there to bring back as liquidity if needed (unless price of house drops).  So I thought you were inferring that the pension worked like a mortgage... in which case I had to guess that you were suggesting that if rates skyrocketed back to some normalized interest rate level, it would become overfunded and the cash could then be brought back.  Something like that.

 

But I suppose, based on your reply, that is not the reason why you compared it to a mortgage.

 

Yes. I think I made it worse by using a bad analogy…

 

A better approach might be to look at it as if it were a tax liability. Once you've paid it down (e.g. by using the revolver) the cash is gone but so is the liability.

[alertmeipp]

If i were a lender, i would look at the pension deficit to determine the borrowing capacity too. It is not that black and white imo

[merkhet]

I think what people are saying is that the form of the liability is immaterial. In your example, they would owe the lien anyway. Does it matter if their liability is a lien or debt if the amount stays the same? It's not 100K out of the homeowner's pocket. It was never his to begin with...

 

LOL!  It's not the same.  You cannot get the money out when you need it, whereas if you paid off actual debt, you could re-borrow that money or issue new debt. 

 

How hard is this for people to understand?  Paying the pension from borrowed funds is not the same as paying off debt (notes, preferreds, convertible debt, debentures, lines of credit, revolvers, etc) in terms of liquidity for the company.  Cheers!

 

As often happens in threads that go for more than a few messages back and forth, it seems like people are talking past one another.

 

--

 

Company #1

Assets: $300

Debt: $100

Lien: $100

Equity: $100

 

If you take out debt to take down the lien, you get the following:

 

Company #1a

Assets: $300

Debt: $200

Equity: $100

 

--

 

Company #2

Assets: $300

Debt(A): $100

Debt(B): $100

Equity: $100

 

If Debt(A) is a revolver with at least $200 of capacity, then you can borrow on Debt(A) to pay Debt(B):

 

Company #2a

Assets: $300

Debt(A): $200

Equity: $100

 

--

 

In the second situation, you have "paid off actual debt," but you cannot "re-borrow that money or issue new debt." In fact, you have already "re-borrowed" new debt to pay off your old debt. I think you were comparing apples to oranges by thinking that when you pay off the debt, you were doing so through cash flow or something. That is not the case we are talking about here.

 

Additionally, in the first example above, assume that the lien is payable at the end of the year -- so at the end of the year, you take on $100 of additional debt to pay off that lien. Yes, your liquidity goes down because you just took out $100 of debt -- but your liquidity was going to go down anyway because you have to pay the lien!

 

What am I missing here?

[merkhet]

parsad, upon further reflection, I still don't quite understand your point. We can even go directly to the pension and debt example and take a look.

 

Company #3: $200 Assets, $100 Pension Liability, $100 Equity

Company #4: $200 Assets, $100 Debt (Revolver), $100 Equity

 

Assume that in each case, $100 of debt is the maximum capacity for the companies, you have to pay the pension at the end of the year and your only assets are cash.

 

Case#1

Assume the pension factors into the debt capacity. In that case, once you pay down the pension, you can borrow $100 of debt, and in that way, you can "take out the money" that you sunk into the pension.

 

Case#2

Assume the pension does not factor into the debt capacity. In that case, you could have taken out $100 in debt at any time you wanted, so you have an extra $100 of liquidity... until you have to pay down the pension at the end of the year -- at which point, you would be in the same position as Company #4 who pays down their debt at the end of the year.

 

Again, I must be missing something. What am I missing?

[premfan]

parsad, upon further reflection, I still don't quite understand your point. We can even go directly to the pension and debt example and take a look.

 

Company #3: $200 Assets, $100 Pension Liability, $100 Equity

Company #4: $200 Assets, $100 Debt (Revolver), $100 Equity

 

Assume that in each case, $100 of debt is the maximum capacity for the companies, you have to pay the pension at the end of the year and your only assets are cash.

 

Case#1

Assume the pension factors into the debt capacity. In that case, once you pay down the pension, you can borrow $100 of debt, and in that way, you can "take out the money" that you sunk into the pension.

 

Case#2

Assume the pension does not factor into the debt capacity. In that case, you could have taken out $100 in debt at any time you wanted, so you have an extra $100 of liquidity... until you have to pay down the pension at the end of the year -- at which point, you would be in the same position as Company #4 who pays down their debt at the end of the year.

 

Again, I must be missing something. What am I missing?

 

8 foot hurdle my friend. 8 foot hurdle.

[BTShine]

I believe they are referring to how paying down the pension liability affects liquidity.  It's a fair point when discussing SHLD as a going concern. 

 

Example 1:

Cash $500

Inventory $500

 

Debt $400

Pension $500

Equity $100

 

 

Example 2 (after paying pension):

Cash $0

Inventory $500

 

Debt $400

Pension $0

Equity $100

 

We can see that paying the pension could drain all cash, which then puts us at the mercy of the capital markets if we want to get cash to replenish our bank account. If that doesn't happen the we are illiquid and could go bankrupt.

 

In a shutdown scenario I believe paying down the pension is very similar to paying down other debt.

[merkhet]

Oh, I totally understand that -- but it's not like they were going to be able to NOT pay into the pension.

 

From now until the time you have to pay the pension obligations, you have a certain amount of liquidity in excess of what you are going to have after you pay into the obligation. I get that. I really do. I personally think it's "phantom liquidity" because it's destined to go away, but, again, I understand.

 

The comparison, though, is using debt to pay into the pension versus using debt to pay off debt. That's what I mean with my Company #1 and Company #2 examples. So the question is -- if you're going to be drawing down debt one way or another, does it matter if you're paying down a pension obligation or a debt obligation?

 

In my view, no. It is completely immaterial. You're replacing your (___) obligation with a debt obligation. Fill in the blank as you will.

[txlaw]

The company's liquidity position probably would be different if they used some amount of short-term funding to pay off long-term debt (particularly, secured debt) vs. contributing to a defined benefit pension plan.  That's because of how lenders might distinguish between debt and pension obligations -- if I'm a lender, I'd much rather have the secured debt paid off, since secured loans have high priority in BK. 

 

But I don't think that's really what the impetus was for ni-co comparing underfunded pension obligations to debt.  He was trying to argue that paying down pension liability is not "value destruction" from a NAV perspective. 

 

There are two misunderstandings going on here:

 

1.  "Cash burn" typically is synonymous with "use of cash for non-discretionary purposes."  Required pension plan contributions are, of course, non-discretionary, so most people are considering it "cash burn" and pointing out, by definition, those contributions are affecting SHLD's liquidity position.  However, ni-co is taking "cash burn" to mean "value destruction" (i.e., reduction in NAV).   

 

2.  The CC quote ni-co posted is simply pointing out that SHLD has been using some amount of its short-term funding to contribute to the pension fund, rather than for operational working capital.  So if you view pension liabilities as similar to debt, the "adjusted net debt position" has actually gone down YoY.  The speaker is talking about this to put the increase in debt in context.  He's trying to imply that the decrease in NAV (due to debt increase) is not as great as it seems on its face.

 

I would point out, though, that it's not a good thing from a liquidity perspective to have to be funding required pension contributions with short term funding.  Hence SHLD's statements that they are looking at changing their capital structure to potentially include more long-term debt.

[jeffmori7]

Is it Lampert himself who makes the investment for the pension fund? Do we know what is inside? The better performance he gets, the less they will have to contribute to this pension fund in the future, so come on Eddy, compound some magic out there!

[txlaw]

Is it Lampert himself who makes the investment for the pension fund? Do we know what is inside? The better performance he gets, the less they will have to contribute to this pension fund in the future, so come on Eddy, compound some magic out there!

 

The Sears Holdings Corporation Investment Committee is responsible for the investment of the assets of Holdings' domestic pension plan. The Investment Committee, made up primarily of select members of senior management, has appointed a non-affiliated third party professional to advise the Investment Committee with respect to the SHC domestic pension plan assets. The plan's overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The plan's investment policy requires investments to be diversified across individual securities, industries, market capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.

[txlaw]

Is it Lampert himself who makes the investment for the pension fund? Do we know what is inside? The better performance he gets, the less they will have to contribute to this pension fund in the future, so come on Eddy, compound some magic out there!

 

The Sears Holdings Corporation Investment Committee is responsible for the investment of the assets of Holdings' domestic pension plan. The Investment Committee, made up primarily of select members of senior management, has appointed a non-affiliated third party professional to advise the Investment Committee with respect to the SHC domestic pension plan assets. The plan's overall investment objective is to provide a long-term return that, along with Company contributions, is expected to meet future benefit payment requirements. A long-term horizon has been adopted in establishing investment policy such that the likelihood and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. The plan's investment policy requires investments to be diversified across individual securities, industries, market capitalization and valuation characteristics. In addition, various techniques are utilized to monitor, measure and manage risk.

 

One interesting thing that I'm aware of:  at one point, the pension plan actually held SHLD senior secured debt.  So pensioners had a secured claim on SHLD assets if it were to go into BK. 

 

I don't know whether the pension fund currently owns SHLD debt.  They sold some of it last year to fund lump sum payments to pensioners.

[Spekulatius]

Any underlying value decreases with each quarter or losses. We're in the 9th quarter and won't last many more quarters of $5 per share losses. It won't be long before they lose more than the entire current market cap

 

And yet....I feel like there has to be something to it. We all know it's a bad and declining business. It's obvious. We know it can't effectively compete with Amazon and that it's a long shot to compete with other retailers. It's obvious.

 

Sometimes, the obvious choice is the correct one. As somebody in these boards states in his Sig:"Not every haystack has a needle."

[ni-co]

The company's liquidity position probably would be different if they used some amount of short-term funding to pay off long-term debt (particularly, secured debt) vs. contributing to a defined benefit pension plan.  That's because of how lenders might distinguish between debt and pension obligations -- if I'm a lender, I'd much rather have the secured debt paid off, since secured loans have high priority in BK. 

 

But I don't think that's really what the impetus was for ni-co comparing underfunded pension obligations to debt.  He was trying to argue that paying down pension liability is not "value destruction" from a NAV perspective. 

 

There are two misunderstandings going on here:

 

1.  "Cash burn" typically is synonymous with "use of cash for non-discretionary purposes."  Required pension plan contributions are, of course, non-discretionary, so most people are considering it "cash burn" and pointing out, by definition, those contributions are affecting SHLD's liquidity position.  However, ni-co is taking "cash burn" to mean "value destruction" (i.e., reduction in NAV).   

 

2.  The CC quote ni-co posted is simply pointing out that SHLD has been using some amount of its short-term funding to contribute to the pension fund, rather than for operational working capital.  So if you view pension liabilities as similar to debt, the "adjusted net debt position" has actually gone down YoY.  The speaker is talking about this to put the increase in debt in context.  He's trying to imply that the decrease in NAV (due to debt increase) is not as great as it seems on its face.

 

I would point out, though, that it's not a good thing from a liquidity perspective to have to be funding required pension contributions with short term funding.  Hence SHLD's statements that they are looking at changing their capital structure to potentially include more long-term debt.

 

Thanks, txlaw. That sums it up pretty well. I wasn't aware of the fact that my use of the term "cash burn" isn't the standard way.

 

I agree that funding long term debt with a revolver credit is not the ideal way to finance a company, but as you said, it's meant to be temporary.

 

Liquidity is not an issue at SHLD at the moment, I think. They still can issue more commercial paper. There's also the potential sale of RE, Sears Canada, Auto. There will be some relief from changes in law regarding the funding requirements for the pension plan.

 

Then again, it might also be attractive to lock in the low interest rates by issuing long term bonds.