SHLDQ - Sears Holdings Corp

[Kraven]

The fact that the secured loans are collateralized with less than the full amount of the owned properties is, in my opinion, a big factor and a big advantage for Sears -- but I suspect we may have to agree to disagree on that.

 

There's a bit of the dazzle dazzle going on with this point too.  No, the loan isn't secured by all of the owned properties, but note that here Lampert handpicked the properties he wants to secure the loan and valued them himself.  In addition, he effectively is secured by all the properties since if something goes wrong with the properties he put on the initial list he can substitute out essentially any other property.  An initial list of substitution properties has also been selected and valued, but others can be added be added if needed upon agreement of the parties (which means Lampert gets to say "hey Eddie, what do you think about swapping Property A for Property B?"  "Oh hey Eddie, that's a swell idea, sure!")

 

Although I know it's not part of the interest rate and fees, the CFO post doesn't mention all the fees that will go into this loan.  To me it's crazy to spend that kind of money on a loan among related parties.  I mean why do they need to get opinions, environmental reports, engineering reports, lien searches, etc on each property in advance?  That all costs a lot of money.  It isn't like he doesn't know the properties.  Why not add it as a condition of foreclosure instead?  That is, if the collateral needed to be foreclosed on they could have it contingent on the properties meeting the various requirements.  That wouldn't fly with unrelated parties, but is he going to refuse to cooperate with himself?

 

Finally, I don't think for a minute the CFO wrote this post.  I would think that Lampert wrote it or at least told the CFO what to write and very carefully (with advisors, counsel, etc) reviewed it before having the CFO send it out under his own name. 

[alertmeipp]

What leaves a bad taste in my mouth is this:

http://www.sec.gov/Archives/edgar/data/1281910/000118143114030186/xslF345X03/rrd415104.xml

 

Schriesheim knew that this was coming and that it was a shit sandwich.

 

What about it?

 

Notes in that filing say the following

 

1. Represents shares surrendered to the issuer to pay the reporting person's tax withholding obligations incurred in connection with the vesting of restricted stock, the award of which was previously reported.

 

So, Lampert doesn't pay taxes on the thousands of shares he got from the company? There is still a choice being made to sell them.

 

 

okay, so the CFO sells to cover taxes gave u a bad taste, and ESL didn't sell and it's not bullish.

[merkhet]

The fact that the secured loans are collateralized with less than the full amount of the owned properties is, in my opinion, a big factor and a big advantage for Sears -- but I suspect we may have to agree to disagree on that.

 

There's a bit of the dazzle dazzle going on with this point too.  No, the loan isn't secured by all of the owned properties, but note that here Lampert handpicked the properties he wants to secure the loan and valued them himself.  In addition, he effectively is secured by all the properties since if something goes wrong with the properties he put on the initial list he can substitute out essentially any other property.  An initial list of substitution properties has also been selected and valued, but others can be added be added if needed upon agreement of the parties (which means Lampert gets to say "hey Eddie, what do you think about swapping Property A for Property B?"  "Oh hey Eddie, that's a swell idea, sure!")

 

Although I know it's not part of the interest rate and fees, the CFO post doesn't mention all the fees that will go into this loan.  To me it's crazy to spend that kind of money on a loan among related parties.  I mean why do they need to get opinions, environmental reports, engineering reports, lien searches, etc on each property in advance?  That all costs a lot of money.  It isn't like he doesn't know the properties.  Why not add it as a condition of foreclosure instead?  That is, if the collateral needed to be foreclosed on they could have it contingent on the properties meeting the various requirements.  That wouldn't fly with unrelated parties, but is he going to refuse to cooperate with himself?

 

Finally, I don't think for a minute the CFO wrote this post.  I would think that Lampert wrote it or at least told the CFO what to write and very carefully (with advisors, counsel, etc) reviewed it before having the CFO send it out under his own name.

 

Remember that he can't just willy-nilly replace properties. There needs to be something actually wrong with them before he can do that.

 

And even assuming that these are good properties, 25 < 900, meaning there are a bunch of other properties that he can use to secure any further loans necessary.

[merkhet]

One thing that popped into my mind this morning.

 

If I remember correctly, St. Joe's has around $700 million in "free cash" that Berkowitz can allocate, and there's a hard limit on the amount of money that he can hold in a single issuer (15% or around $105 million).  He already had $103 million in the unsecured bonds of Sears.

 

So it seems like he'll have to dump his existing bonds to switch out for this one.

[Kraven]

The fact that the secured loans are collateralized with less than the full amount of the owned properties is, in my opinion, a big factor and a big advantage for Sears -- but I suspect we may have to agree to disagree on that.

 

There's a bit of the dazzle dazzle going on with this point too.  No, the loan isn't secured by all of the owned properties, but note that here Lampert handpicked the properties he wants to secure the loan and valued them himself.  In addition, he effectively is secured by all the properties since if something goes wrong with the properties he put on the initial list he can substitute out essentially any other property.  An initial list of substitution properties has also been selected and valued, but others can be added be added if needed upon agreement of the parties (which means Lampert gets to say "hey Eddie, what do you think about swapping Property A for Property B?"  "Oh hey Eddie, that's a swell idea, sure!")

 

Although I know it's not part of the interest rate and fees, the CFO post doesn't mention all the fees that will go into this loan.  To me it's crazy to spend that kind of money on a loan among related parties.  I mean why do they need to get opinions, environmental reports, engineering reports, lien searches, etc on each property in advance?  That all costs a lot of money.  It isn't like he doesn't know the properties.  Why not add it as a condition of foreclosure instead?  That is, if the collateral needed to be foreclosed on they could have it contingent on the properties meeting the various requirements.  That wouldn't fly with unrelated parties, but is he going to refuse to cooperate with himself?

 

Finally, I don't think for a minute the CFO wrote this post.  I would think that Lampert wrote it or at least told the CFO what to write and very carefully (with advisors, counsel, etc) reviewed it before having the CFO send it out under his own name.

 

Remember that he can't just willy-nilly replace properties. There needs to be something actually wrong with them before he can do that.

 

And even assuming that these are good properties, 25 < 900, meaning there are a bunch of other properties that he can use to secure any further loans necessary.

 

Well, you're technically right. He can't just swap out properties because he feels like it. But the hole on doing so is fairly broad. Basically any information he obtains in a post closing deliverable (all the reports, opinions, etc) which he reasonably determines makes the property unacceptable collateral means he can require a substitute property. There are other exceptions too some directly impacting the value of the property. If you've ever seen a commercial property file you will know they are never perfect. One can always find something that would be considered reasonable.

 

Interestingly, if a property does need to be substituted it's the company that determines which one on the list to use. So he gets to just swap out hats to do that.  You are correct that the other properties not subject to this agreement could be used to obtain further financing or at least are not prohibited by this agreement from doing so.

 

It's funny how even some boilerplate provisions can become loaded in the context of their current situation. For example, the company can not contribute to the pension if it would be reasonably likely to cause a material adverse effect. Nothing unusual about that at all except that an MAE includes something which affects the use or value of the properties. So imagine a scenario where they need to put money in but that money is required for maintenance on properties or something like that. That is, there isn't enough to go around. Eddie could declare that an event of default.

 

Lots of little gifts in here for him if he felt like using them. Not saying he does, just that he's very well protected.

[ni-co]

okay, so the CFO sells to cover taxes gave u a bad taste, and ESL didn't sell and it's not bullish.

 

This has nothing to do with being bearish. If you think that I'm bearish you haven't followed this thread very closely. I still don't like the timing of this sale. That's all. I also don't like that they obviously hadn't involved Berkowitz. It's, like merkhet rightly pointed out, bad optics. The optics are so bad that people rather believe in some kind of conspiracy than believing what Sears says, that it's just a bridge loan.

[txlaw]

I agree with you.  The 1.75% fee should be included.  Over a 5 month duration -- which means that's approx an additional .35% each month (1.75/5 = .35), or an additional ~4.2% a year.  That equals 9.2% annualized, or 5.2% + 4.2%.  I know these numbers aren't perfect, but I believe they're approximately right.

 

Yep.  Our rate calculations differ only due to different expected terms - 5 months with the extension vs. 3.5 months without.  I used 3.5 months since the CFO said the loan "is expected to be paid off at the end of the year."

 

In any case, the borrowing rates are hardly favorable compared to the competitors to which he referred.

 

These are great points.  I didn't even think about the arranging fee in the context of a 5 month loan.  ESL fooled me (call it a brain fart). 

 

Yeah, that is actually a pretty crappy interest rate. 

 

Maybe Bruce B really is going activist because of the terms.

[ni-co]

Although I know it's not part of the interest rate and fees, the CFO post doesn't mention all the fees that will go into this loan.  To me it's crazy to spend that kind of money on a loan among related parties.  I mean why do they need to get opinions, environmental reports, engineering reports, lien searches, etc on each property in advance?  That all costs a lot of money.  It isn't like he doesn't know the properties.  Why not add it as a condition of foreclosure instead?  That is, if the collateral needed to be foreclosed on they could have it contingent on the properties meeting the various requirements.  That wouldn't fly with unrelated parties, but is he going to refuse to cooperate with himself?

 

Don't you think that they would have done the whole work anyway? After all, it's just a bridge loan and they announced to tap the real estate in one way or the other.

[peter1234]

It isn't like he doesn't know the properties. 

 

Are you sure about this? Do you think he ever set foot into a store?

;D

[merkhet]

So I think I figured out what's differentiating the way I see the loan and the way others are seeing the loan -- people are generally looking at the effective interest rate and thinking that this is a crappy rate for a secured loan -- whereas I'm looking at the loan and thinking that the fact that they only tied up 25 properties is a good thing.

 

At the end of the day, it's tough to tell one way or the other. The 10% effective rate (or whatever it ends up being) could be really high if the 25 properties are the best properties -- and therefore, likely overcollateralized. It could also be pretty low if it's tying up 25 Detroit-esque properties.

 

It's difficult to tell on the outside.

[Picasso]

So I think I figured out what's differentiating the way I see the loan and the way others are seeing the loan -- people are generally looking at the effective interest rate and thinking that this is a crappy rate for a secured loan -- whereas I'm looking at the loan and thinking that the fact that they only tied up 25 properties is a good thing.

 

At the end of the day, it's tough to tell one way or the other. The 10% effective rate (or whatever it ends up being) could be really high if the 25 properties are the best properties -- and therefore, likely overcollateralized. It could also be pretty low if it's tying up 25 Detroit-esque properties.

 

It's difficult to tell on the outside.

 

Why would Eddie go through all the trouble and extra covenants if they were "Detroit-esque". That would not make any sense.

 

The facts is, the CFO put some major spin on how expensive the loan is compared to an alternative. The upfront points is quite out of whack to begin with.

[merkhet]

So I think I figured out what's differentiating the way I see the loan and the way others are seeing the loan -- people are generally looking at the effective interest rate and thinking that this is a crappy rate for a secured loan -- whereas I'm looking at the loan and thinking that the fact that they only tied up 25 properties is a good thing.

 

At the end of the day, it's tough to tell one way or the other. The 10% effective rate (or whatever it ends up being) could be really high if the 25 properties are the best properties -- and therefore, likely overcollateralized. It could also be pretty low if it's tying up 25 Detroit-esque properties.

 

It's difficult to tell on the outside.

 

Why would Eddie go through all the trouble and extra covenants if they were "Detroit-esque". That would not make any sense.

 

The facts is, the CFO put some major spin on how expensive the loan is compared to an alternative. The upfront points is quite out of whack to begin with.

 

I can flip it around and ask why bother having the capability to switch the properties around if he has the 25 best properties? He would only be trading down.

 

The trouble and extra covenants would make sense only if he was worried that deterioration would cause the loan to be under-collateralized, no?

[wisdom]

Eddie has to ensure he is doing the right thing by ESL as well.

 

Bridge financing tends to be more expensive because it is for a short time period. The Lender needs to be compensated for the work put in for 3 or so months. It is expensive to invest those funds so soon due to the work required.

[heth247]

Here is my thought, the "hole" on the 25 properties is left there to please the ESL partners so that SHLD get a favorable interest rate from ESL. Consider it as a "concession".

 

As for the argument of effective interest of 10%,  we never know what alternative terms and effective interest quote they received from outside lenders. I honestly don't think SHLD will choose to take the loan from ESL if there exists an alternative that is similar in terms and interest rate, given the bad optics and conflict of interest as the consequence.

 

The bottom-line, it is likely that the loan will be paid off on 12/31, and all the fees + interest they pay will total to only $12MM. The the 25 properties are freed again.

 

 

[Luke 532]

The bottom-line, it is likely that the loan will be paid off on 12/31, and all the fees + interest they pay will total to only $12MM. The the 25 properties are freed again.

 

Bingo.  And those that are adding due to their courage in their conviction are getting shares $6 (18%) cheaper as a result of all this "Sears is doomed," "bankruptcy," "Eddie is stealing the company" nonsense which has led to Mr. Market-esque price action.

 

And I don't know about other shareholders, but I really don't mind paying less than $0.12 per share in interest and fees for $400M of liquidity through the holiday season.  Heck, the bid/ask spread is oftentimes near $0.12.

[oddballstocks]

Looks like Sears Canada failed to attract any realistic bids, which was the reason for the short term loan.  No infusion of cash coming soon.

 

http://nypost.com/2014/09/22/sears-canada-auction-flop-darkens-outlook/

[Kraven]

Looks like Sears Canada failed to attract any realistic bids, which was the reason for the short term loan.  No infusion of cash coming soon.

 

http://nypost.com/2014/09/22/sears-canada-auction-flop-darkens-outlook/

 

I'm pretty surprised.  I thought the last ask was for a large coffee and a dozen donuts from Tim Horton's.

[merkhet]

I'm pretty surprised as well.

[peter1234]

Fitch chimes in:

 

Sears Holdings' $400 million secured short-term loan received last week from Edward Lampert's ESL Investments "is a temporary and short-term fix to a much larger need for liquidity infusion," asserts Fitch Ratings, citing the embattled retailer's "significant cash burn." In the report Fitch estimates EBITDA (cash flow) will be negative $1 billion in 2014 and potentially worse in 2015. Fitch thinks the company needs to generate a minimum EBITDA of $1 billion per year from 2014 through 2016 to service cash interest expense, capital expenditures and pension plan contributions.

At the same time Fitch expects Sears to burn $2 billion or more in cash annually. Fitch also estimates the retailer needs roughly $600 million to $700 million in liquidity to fund seasonal holiday working capital needs. The debt rating company says Sears' remaining choices for raising capital include selling Sears Canada, issuing additional second-lien debt, further cutting working capital and issuing real estate-backed debt.

"Given the high rate of cash burn in the business, should Sears even be able to execute on a number of these fronts" these actions would take them through 2016, Fitch states in the report. The upshot: "Fitch expects that the risk of restructuring will be high over the next 12-24 months."

[tooskinneejs]

watching this unfold with Sears is like watching a guy rip up the floorboards in his house to use for firewood to get him through the cold winter. It will only keep his house warm for so long and then his house will be in shambles. Fascinating to watch.

[oddballstocks]

watching this unfold with Sears is like watching a guy rip up the floorboards in his house to use for firewood to get him through the cold winter. It will only keep his house warm for so long and then his house will be in shambles. Fascinating to watch.

 

Maybe the best description of what's happening with Sears.

 

The silence to the Sears Canada news is deafening, maybe the bulls are busy trying to invent a rationalization as to how this is good news.  To me that and the short term loan are like the Titanic hitting the ice berg.  You know something's seriously wrong and there's still time to get out, but you need to act now.

 

 

[heth247]

watching this unfold with Sears is like watching a guy rip up the floorboards in his house to use for firewood to get him through the cold winter. It will only keep his house warm for so long and then his house will be in shambles. Fascinating to watch.

 

Maybe the best description of what's happening with Sears.

 

The silence to the Sears Canada news is deafening, maybe the bulls are busy trying to invent a rationalization as to how this is good news.  To me that and the short term loan are like the Titanic hitting the ice berg.  You know something's seriously wrong and there's still time to get out, but you need to act now.

 

I am bull and here is my "spin" :-) 

1.If Eddie is really desperate for cash, he probably would have sold Sears Canada for cheap. But he did not.

2. They have tried to sell LE for a long time and no bids either. Why would we expect Sears Canada sold quickly?

 

 

[Vish_ram]

watching this unfold with Sears is like watching a guy rip up the floorboards in his house to use for firewood to get him through the cold winter. It will only keep his house warm for so long and then his house will be in shambles. Fascinating to watch.

 

I gave a similar analogy a year back.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg127737/#msg127737

 

" Like Phileas Fogg in "around the world in 80 days", you have to burn parts of ship to keep going. The Q is would it reach the port soon enough?"

[randomep]

 

 

Can anyone give background info on baker street capital? thanks

[Kraven]

 

 

Can anyone give background info on baker street capital? thanks

 

They are almost certainly huge Gerry Rafferty fans.  More than that, I don't know.