SHLDQ - Sears Holdings Corp

[Kraven]

Loan agreement was filed.

 

http://www.sec.gov/Archives/edgar/data/923727/000119312514343172/d790285dex997.htm

 

Thanks. Quickly flipped through it. I may have missed it but it doesn't seem as if Lampert can just substitute properties as he feels like it, but he can upon any glitch with respect to the designated properties or related documentation. So maybe it amounts to the same thing.

 

A couple things I found interesting. It doesn't appear that the 25 properties will be disclosed. They are on a separate officers certificate that isn't attached. It appears as if substitute properties are already designated as well although if they needed more they could agree to add them later. In terms of how the properties are valued that is also not part of the agreement and is defined as being the value on the officers certificate. So assume it's "fair", but probably on the less than generous side. Assume too that the initial list of 25 adds up to around $400 mil. He knows what properties he wants.

 

I found it interesting that all the bells and whistles are here in terms of what Sears is required to do. I wouldn't expect less, but in this case it leads to some odd things. For example, Sears can't do various things to the properties without "Lender's" consent, but Lampert is the one who would have made that determination as CEO.  I found it interesting that they need to obtain an opinion of local counsel on each property. Again, it is to be expected but it wouldn't be unusual for related parties to waive an expensive condition like that (as well as environmental studies, etc). There's lots of stuff like that.

 

This is where wearing different hats causes issues. For the conspiracy theorists out there it is possible that Lampert as CEO could cause Sears to do something that Lampert as managing partner of ESL rejects. How would that play out in court?  Strangely. There are competing interests which would need to be weighed.

 

Just as an aside anyone thinking these funds might be used to buy back stock will be disappointed. They cannot be.

 

The whole agreement is just strange given that it's Lampert essentially on both sides via the two corporate entities.

[Grenville]

Kraven,

 

Appreciate your comments, especially from someone who knows what to look for in a document like that. It's an interesting transaction and will be more interesting if Berkowitz gets to take part.

 

[Kraven]

I will add that there is no doubt in my mind that these funds were necessary in light of liquidity needs. It is clear to me that any other funds available would have been prohibitively expensive. Just thinking about the costs involved in this loan arrangement there is no way Lampert did this to send a message or show the market something. The amounts that will have to be spent and have already been spent to do this (all paid by Sears) are huge. They have 2 of the top firms in the country doing legal. They are requiring local counsel opinions on each property along with environmental studies, etc. It will cost millions in fees and expenses to get all this stuff done.

[wisdom]

ESL has provided SHLD similar financing in the past when they were downgraded and rates were too high. You can look up the history.

 

This is something he does when he feels the market rates SHLD would have to pay are too high.

[wisdom]

Also,in the past all of SHLD profits are earned in the 4th quarter. It was the norm to have losses in the 1st 3 quarters of the year.

 

And their borrowings peak in the 4th quarter as that is when their inventory needs peak as well. But, they drop after christmas.

[randomep]

This is such a unique situation to me. I got out 2 years ago, I have no idea what's going on. Lampert and Berkowitz are going to school me on investing, just like a master teaching a student.

[merkhet]

Loan agreement was filed.

 

http://www.sec.gov/Archives/edgar/data/923727/000119312514343172/d790285dex997.htm

 

Just as an aside anyone thinking these funds might be used to buy back stock will be disappointed. They cannot be.

 

 

Actually, that's not what it says.

 

Section 3.16. Use of Loan Proceeds. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulations T, U or X or any other Regulations of such Board of Governors, or for any purpose prohibited by Legal Requirements or by the terms and conditions of the Loan Documents. The Loan is solely for the general corporate purposes of Borrower, Guarantor and the subsidiaries and no portion thereof shall be used for personal, consumer, household or similar purposes.

 

My read on that is that they're not allowed to use the money to purchase stocks "on margin." Meaning,  they can't use the loan proceeds to purchase $600 million of stock. It says nothing about using the loan proceeds to buy $400 million of stock.

[Kraven]

ESL has provided SHLD similar financing in the past when they were downgraded and rates were too high. You can look up the history.

 

This is something he does when he feels the market rates SHLD would have to pay are too high.

 

I can't speak to that. I wonder if in those cases there was the specified properties, etc.

[merkhet]

ESL has provided SHLD similar financing in the past when they were downgraded and rates were too high. You can look up the history.

 

This is something he does when he feels the market rates SHLD would have to pay are too high.

 

I can't speak to that. I wonder if in those cases there was the specified properties, etc.

 

I think in those cases, he invested in the (unsecured) commercial paper.

[Kraven]

Loan agreement was filed.

 

http://www.sec.gov/Archives/edgar/data/923727/000119312514343172/d790285dex997.htm

 

Just as an aside anyone thinking these funds might be used to buy back stock will be disappointed. They cannot be.

 

 

Actually, that's not what it says.

 

Section 3.16. Use of Loan Proceeds. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System or for any other purpose that would be inconsistent with such Regulations T, U or X or any other Regulations of such Board of Governors, or for any purpose prohibited by Legal Requirements or by the terms and conditions of the Loan Documents. The Loan is solely for the general corporate purposes of Borrower, Guarantor and the subsidiaries and no portion thereof shall be used for personal, consumer, household or similar purposes.

 

My read on that is that they're not allowed to use the money to purchase stocks "on margin." Meaning, can't use the money to buy stock on margin. It says nothing about using the loan proceeds to buy stock outright.

 

No, that's not what margin stock is. It is a prohibition on using borrowed funds for the purpose of buying certain types of equities and other securities. Stocks on a public exchange are included in that. So they could not buy SHLD.

[merkhet]

Nevermind. You're right.

 

http://www.law.cornell.edu/cfr/text/12/220.2

 

Margin security means:

(1) Any security registered or having unlisted trading privileges on a national securities exchange;

 

In any case, it would have been pointless as I agree with you that this is likely for holiday inventory ramp up purposes.

[CorpRaider]

Sub-$30 is just ridiculous.  I added a little bit to my already large position today at $29.85 average.

 

How do you decide the price is ridiculous? What if the share price drops to 15 from here and Lampert takes it private at 25?  That seems like a very plausible scenario to me.

 

I suspect that Berkowitz, as a holder of about 23% of the common, would be rather litigious about a going private transaction at $25 a share.

 

 

Have we talked about what happens if Lampert and Berkowitz start publicly fighting about Sears? That would be nuts. I have read very little to believe they are cooperating beyond a board seat.

 

13 D filed...guns hot?

[HeresyValue]

Sub-$30 is just ridiculous.  I added a little bit to my already large position today at $29.85 average.

 

How do you decide the price is ridiculous? What if the share price drops to 15 from here and Lampert takes it private at 25?  That seems like a very plausible scenario to me.

 

I suspect that Berkowitz, as a holder of about 23% of the common, would be rather litigious about a going private transaction at $25 a share.

 

 

Have we talked about what happens if Lampert and Berkowitz start publicly fighting about Sears? That would be nuts. I have read very little to believe they are cooperating beyond a board seat.

 

13 D filed...guns hot?

 

From Berkowitz's 13-D. Nothing new, really.

 

Item 4.

Purpose of Transaction.

 

The Reporting Persons have acquired their Shares of the Issuer for investment.  The Reporting Persons evaluate their investment in the Shares on a continual basis.  The St. Joe Company, an affiliate of the Fund and Fairholme, is in discussions with the Issuer regarding the $400 million secured short-term loan disclosed on the 8-K filed by the Issuer on September 15, 2014 (the "Short-Term Loan").  The St. Joe Company may invest up to $100 million in participations relating to the Short Term Loan.  The Reporting Persons have no other plans or proposals as of the date of this filing which, relate to, or would result in, any of the actions enumerated in Item 4 of the instructions to Schedule 13D, except as set forth below.

 

The Reporting Persons reserve the right to be in contact with members of the Issuer's management, the members of the Issuer's Board of Directors, other significant shareholders and others regarding alternatives that the Issuer could employ to increase shareholder value.  The contact may include proposing or considering any of the actions enumerated in Item 4 of the instructions to Schedule 13D.

 

The Reporting Persons reserve the right to effect transactions that would change the number of shares they may be deemed to beneficially own.

[CorpRaider]

Yeah I saw that, he should have let berkowitz (or anyone else)make the loan to begin with.  How pissed is berk buying a couple hundred thousand shares days before lampert drops a feces sandwich.  Hmm 25% of the loan, 25% of the stock. 

[alertmeipp]

13 D filed...guns hot?

 

YES, this should get interesting. But what can he really do? ESL is such a major shareholder.

[Luke 532]

Somebody e-mailed me today with the chart below regarding SPG and SHLD.  Curious if the 40 anchor store decline (5.7M sq ft) is due to planned redevelopment, pending sub-leases, other, etc.  Thoughts?

 

Date          # Stores      Sq Ft    % of SPG

6-30-14    76              12.55M  6.9%

3-31-14    116            18.25M  7.7%

12-31-13  116            18.25M  7.7%

9-30-13    118            18.48M  7.8%

6-30-13    118            18.48M  7.7%

[krazeenyc]

Somebody e-mailed me today with the chart below regarding SPG and SHLD.  Curious if the 40 anchor store decline (5.7M sq ft) is due to planned redevelopment, pending sub-leases, other, etc.  Thoughts?

 

Date          # Stores      Sq Ft    % of SPG

6-30-14    76              12.55M  6.9%

3-31-14    116            18.25M  7.7%

12-31-13  116            18.25M  7.7%

9-30-13    118            18.48M  7.8%

6-30-13    118            18.48M  7.7%

 

spinoffs.

[merkhet]

Does the negotiation of this loan purchase require Berkowitz to file a 13D? Anyone know?

[txlaw]

I don't think there's necessarily anything weird going on here between ESL and Berkowitz.

 

ESL arranged for a $400 M secured loan (where the collateral was unencumbered RE) for SHLD, $200 million of which has yet to be funded.  As arranger, ESL -- his affiliated funds, really -- got points on the principal amount (1.75%), and he reserved the right to assign parts of the loan or to sell participations in the loan, as any arranger would.  Berkowitz's filing says that St. Joe is in discussions to purchase a $100 M participation in the loan.  There's really nothing more substantive than that in the filing, other than disclosing more purchases by Berkowitz.  Presumably, Berkowitz filed a 13D because he isn't just some lender, but also a substantial holder of SHLD common (over 5%). 

 

For all we know, ESL has actually saved SHLD quite a bit of money by arranging the loan unilaterally -- i.e., without i-bankers -- at a low base interest rate (5%) and with smaller fees than what an i-bank would have taken.  I would not be surprised at all if ESL had been in negotiations with investment bankers and potential leveraged loan lenders who wanted far worse terms, especially once SHLD got hit with downgrades.

 

So, yeah, I don't think there's any reason to delve into conspiracy theory here.

[peridotcapital]

Somebody e-mailed me today with the chart below regarding SPG and SHLD.  Curious if the 40 anchor store decline (5.7M sq ft) is due to planned redevelopment, pending sub-leases, other, etc.  Thoughts?

 

Date          # Stores      Sq Ft    % of SPG

6-30-14    76              12.55M  6.9%

3-31-14    116            18.25M  7.7%

12-31-13  116            18.25M  7.7%

9-30-13    118            18.48M  7.8%

6-30-13    118            18.48M  7.7%

 

spinoffs.

 

Exactly, that's just from SPG spinning off WPG. Interestingly, WPG just announced a deal to buy GRT to increase the quality of their portfolio and the stock got crushed. If you want some solid real estate (similar to Seritage's properties), at a good price, and without Sears' retail operations baggage, take a look at WPG under $17/share (FD: I'm long).

[alertmeipp]

Wasnt 13d mean for non passive

[randallchsu]

So is it safe to assume that they've already used up whatever is available under the $500 million unsecured commercial paper?

[merkhet]

I don't think there's necessarily anything weird going on here between ESL and Berkowitz.

...

Presumably, Berkowitz filed a 13D because he isn't just some lender, but also a substantial holder of SHLD common (over 5%). 

...

So, yeah, I don't think there's any reason to delve into conspiracy theory here.

 

What I meant by the 13D requirement is the following:

 

(1) If Berkowitz was required to file a 13D, then that's a non-signal.

(2) If Berkowitz was not required to file a 13D, then switching from a 13G to a 13D would give us a little peek behind the curtain.

 

I'm basically trying to figure out if Berkowitz is pissed or pleased right now. For instance, was Berkowitz happy that St. Joe is getting a chance to participate? Or is St. Joe the unexpected houseguest right now?

[txlaw]

Wasnt 13d mean for non passive

 

Yes, but I think the 13D may be necessary because Fairholme is entering into loan negotiations with the controlling shareholder, which essentially means that they are influencing the control of the issuer.

 

Don't necessarily know if that means Berkowitz is "going activist," so to speak.  But keep in mind that I'm not a securities lawyer.

[txlaw]

I don't think there's necessarily anything weird going on here between ESL and Berkowitz.

...

Presumably, Berkowitz filed a 13D because he isn't just some lender, but also a substantial holder of SHLD common (over 5%). 

...

So, yeah, I don't think there's any reason to delve into conspiracy theory here.

 

What I meant by the 13D requirement is the following:

 

(1) If Berkowitz was required to file a 13D, then that's a non-signal.

(2) If Berkowitz was not required to file a 13D, then switching from a 13G to a 13D would give us a little peek behind the curtain.

 

I'm basically trying to figure out if Berkowitz is pissed or pleased right now. For instance, was Berkowitz happy that St. Joe is getting a chance to participate? Or is St. Joe the unexpected houseguest right now?

 

See my last post. 

 

Although I'm not a securities lawyer (so don't take my opinion/speculation as advice or anything), I think that Berkowitz is required to file a 13D because of the nature of the transaction.  Because he will be negotiating with the control shareholder to buy a participation, I think that could require him to do the 13D because he will have the effect of influencing the control of the issuer.

 

But I may be wrong. 

 

Actually, it's also entirely possible that Berkowitz just decided to file a 13D instead of a 13G because there is no clear answer to whether he ought to file the full 13D or go with the abbreviated 13G filing.  That happens sometimes when the law isn't clear on a particular issue -- people who are sane will go with the more conservative action.