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SHLDQ - Sears Holdings Corp


alertmeipp

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Have some CDS spread info:

Company name , Moodys rating, Spread on OCt 8th, Spread on Oct 1st, difference.

Penney (J.C.) Corporation, Inc.      Caa2              787            728              60

Toys 'R' US, Inc.                              Caa2            1,731          1,693              38

Sears Holdings Corp.                      Caa2            2,148          2,112              36

 

 

As you said and as illustrated in article below, “The Sears Canada transaction may improve the creditworthiness of Sears Holdings, even while the increasing options put/call open-interest ratio and steepening put skew indicate risk to the equity.”

 

http://www.bloomberg.com/news/2014-10-07/traders-losing-faith-send-sears-bearish-bets-to-record.html

 

that would explain the increase in bearish bets on the equity but decreasing cost of insurance on the debt.

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Clearly only fear mongering when bonds on JCP yield half that of SHLD.

 

So bond markets are efficient and not susceptible to the pitfalls of fear and greed?  That's an interesting theory.

 

There's a major difference between bond and equity investors.  A bond investor is worried about not losing money, their gain is capped.  If they can ensure they don't lose any money they lock in whatever rate is paid on the bonds.  The bond investor is asking two questions, "will I get my money back?" and "will they pay the interest we have agreed to?"

 

It's because of this that bond markets are often looked at for risk analysis.  That's the job of a fixed income analyst, ensure that the credit is good.  Banking is similar, the upside isn't that great from anything loan based, so to make a reasonable return errors need to be eliminated.  An equity investor just needs to shoot 60% and they'll have satisfactory returns.  A few duds can be made up by a stock or two returning a few hundred percent.  It takes a lot of 4% credits and a LONG time to make back a total loss on a bond or loan.

 

 

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If those bonds are inefficiently priced, I can earn 20% a year by purchasing the debt of unsecured retail ops. 

 

Maybe they are wrong too. But it is a mistake to think the drop is only short sellers trying to spook the market. Almost every aspect of the Sears capital structure has taken it in the chin.

 

I follow a lot of unsecured bonds still trading at 6% yields when the stock has lost 80% of its value. SHLD is somewhat unique in that both the bonds and stock are performing poorly.

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sampr01

+1

 

This is just entertainment for most it seems - 0 value add.

 

+1

 

Even for entertainment purposes, please use new jokes than the mustache ones. I am bored.

 

Right, unfortunately things like "Sears holds sale, no one comes" or "Kmart closes store, residents weren't even aware it was open" just don't have the same ring to them.

 

Oddball, the entertainment value of this thread has gone way up, as SHLD stock has gone down.

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Maybe they are wrong too. But it is a mistake to think the drop is only short sellers trying to spook the market.

 

I never said that.  I was only making the point that bond markets are inefficient.  They might not be as inefficient as equity markets, but to think they are efficient would be a mistake. 

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Maybe they are wrong too. But it is a mistake to think the drop is only short sellers trying to spook the market.

 

I never said that.  I was only making the point that bond markets are inefficient.  They might not be as inefficient as equity markets, but to think they are efficient would be a mistake.

 

Sorry, I was referring to the comment made by 20ppy that short sellers are perpetuating this drop.  I agree with you that the bond markets are also subject to emotional swings.

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Maybe they are wrong too. But it is a mistake to think the drop is only short sellers trying to spook the market.

 

I never said that.  I was only making the point that bond markets are inefficient.  They might not be as inefficient as equity markets, but to think they are efficient would be a mistake.

 

I'm not sure I agree with this, hence my earlier comment.  I remember a grid from the CFA books that showed default rate by rating.  This was before the financial meltdown with mortgages being marked to AAA, but ratings were statistically significant in terms of default rate.  There is a higher likelihood of a B- bond going south compared to an A-.

 

I would look this up, but the Fixed Income CFA book is holding up my monitor right now and I'm not in the mood to tear apart my desk.

 

Bonds are not perfectly efficient, but there are much different market dynamics at play.  Bonds typically trade close to their ratings, it's a very relative market.  There are still humans at the keyboard so anything can happen, but I don't think bonds are subjected to the same forces that equities are.  This is especially true due to that fact that to get decent pricing on a bond trade you need to be moving a lot of money.

 

Ok, I found a link from Fitch showing their default rates by rating from 1990-2013: https://www.fitchratings.com/web_content/nrsro/nav/NRSRO_Exhibit-1.pdf (check out page 10).

 

So for a C to CCC credit like Sears over a one year time period only 23% default, so there's a 77% chance these bonds don't default.  But look at a single B compared to a CCC, 1.94% default over a year verses 23%.

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One other thought, someone asked if they'd be bankrupt by Christmas.  I guess it's possible, but I doubt it.  Their operating leverage is working against them right now, but defaults are usually slow motion train wrecks.  Look at Radio Shack, they've been dying since the 1980s and they still haven't defaulted.  They have some serious issues but they've still been able to push forward.  So within that I think Sears will somehow figure out a way to keep moving forward.

 

As of now they have the loan from ESL, plus the proceeds from the Sears Canada stake.  I know earlier someone mentioned possible credits due in 2016 or 2017, which could be a problem, but that's also a long way off.

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Something interesting to note is the difference in yield between similarly rated bonds.  Like I said, the JCP bonds are yielding half of SHLD with the same rating.  It is likely that you will see continued downgrades in the rating as the agencies keep up with what the market is saying.

 

Not that the market has to be right, but generally the agencies will follow.

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Re: bond yields -

 

I think bond markets are if anything less efficient, and dumber, than the equity markets. But they are usually asked much simpler questions.

 

You can earn 20+% guaranteeing bonds against a default through December 2015. That's almost absolutely less risky than the equity, over such a short time period, and covers the same assets - it should provoke some questions about what are my return thresholds?

 

In some sense being highly concentrated in Sears equity (as opposed to taking a small flyer) is not just saying "I'm bullish on Sears from here", it's saying "20%/year doesn't do it for me - I need more return and am willing to take more risk". The first statement seems perfectly reasonable to me, not knowing enough about the name, but the second statement seems to evince a very aggressive approach.

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Re: bond yields -

 

I think bond markets are if anything less efficient, and dumber, than the equity markets. But they are usually asked much simpler questions.

 

You can earn 20+% guaranteeing bonds against a default through December 2015. That's almost absolutely less risky than the equity, over such a short time period, and covers the same assets - it should provoke some questions about what are my return thresholds?

 

In some sense being highly concentrated in Sears equity (as opposed to taking a small flyer) is not just saying "I'm bullish on Sears from here", it's saying "20%/year doesn't do it for me - I need more return and am willing to take more risk". The first statement seems perfectly reasonable to me, not knowing enough about the name, but the second statement seems to evince a very aggressive approach.

 

Owning SRAC bonds does not necessarily mean you are senior to equity.  Thus far the equity is the favored beast that gets the choicest pieces of meat from the carcass; the large chunks of de-risking value that were SHOS and LE.

 

No longer a dog in this fight (sold at about $36 SHLD, $10 LE) as the cash burn reached a point of thesis change and I find it easier to own other things that are simpler, but I would caution those who think the SRAC's are in a  favored position.

 

PS: I'm not trying to give Kraven an aneurysm or ignite the whole guarantor/non-guarantor thing, just pointing out this isn't your run of the mill company structure.

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For what it is worth, the SRAC 6.5% of 2028 was trading under $20 in 2009.  They are still trading at $53 today.

 

I personally think the situation for SHLD is worse now than 2009 so the prices surpise me.  I wonder if things get hairy whether some of their bonds might end up providing better returns.

 

The SRAC bonds were a pretty decent deal in 2009 (although a lot of other distressed bonds were too).  But you would have returned a total of $66 dollars on less than a $20 dollar purchase cost.  The equity has not returned nearly as much.

 

Then again many were able to trade around their equity position or take advantage of some of the short squeezes.

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The efficiency of the equity and bond market are both subject to how much information/knowledge they know about the company.  The problem here is that SHLD is such a big black box that nobody really knows how well SYW works, what types of new capital structure SHLD is trying to put in place, other than that the operation sucks and it is bleeding the company to death. I wouldn't think bond market is much more efficient (or correct) than the equity market at this point. The owner of the company probably knows these information much better than anybody else. But now people all think he is just a crazy billionaire.

 

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The owner of the company probably knows these information much better than anybody else. But now people all think he is just a crazy billionaire.

 

I would think the BOD is 2nd in line in terms of knowing the most about the company.  It just seems really, really odd to me that Berkowitz has added so much in the past year unless he's getting positive internal information from Alvarez.  And what is up with Stahl adding 65% and Fine 85% to their positions in the past 3 quarters?  I wonder if they ever pick up the phone and talk with each other, or with Berkowitz, about SHLD. 

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