SHLDQ - Sears Holdings Corp

[jmp8822]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

[ni-co]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

[FCharlie]

ESL and Bruce could do this again next year if need be. They could do this a couple more years, buying everything in sight, and ending up with the whole company.

 

If it takes three or four more years to get the leasing where it needs to be, so what?  A company like Simon has an enterprise value of $75 Billion and as Bruce always says, Sears has more property than Simon.

 

 

 

 

[heth247]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

[ni-co]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

 

You're right. Not so crazy, after all.

[heth247]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

 

You're right. Not so crazy, after all.

 

Glad that we agree on that.  ;) Even for us who don't spend the $175 to buy the SHLDZ, the yield is not  40/280=14% because we indirectly "paid" for the $175 by suffering a drop in SHLD's share price.

 

[BTShine]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

 

You're right. Not so crazy, after all.

 

Glad that we agree on that.  ;) Even for us who don't spend the $175 to buy the SHLDZ, the yield is not  40/280=14% because we indirectly "paid" for the $175 by suffering a drop in SHLD's share price.

 

I see it as you pay $660 today ($160 for the SHLDZ right and $500 to exercise it) and every year you get $40 while you wait (40/660 = 6% return) and in 5 years you end up with 17.6 shares (by rolling over the $500 bond to exercise the warrants). 

 

So, for $660 you get a 6% return annually and 17.6 shares ($37.71 a share) at the end of the 5 yr term.

 

Or, you could just use your $660 to buy 18.85 shares today at $35/share.  This way if there's more rights distributions, etc. you participate in them.  Just owning the warrants might not allow participation in all future corporate actions.

[ni-co]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

 

You're right. Not so crazy, after all.

 

Glad that we agree on that.  ;) Even for us who don't spend the $175 to buy the SHLDZ, the yield is not  40/280=14% because we indirectly "paid" for the $175 by suffering a drop in SHLD's share price.

 

Though, I'd say the warrants are worth significantly more. A $15 call price's implied volatility is 27% (if my math is right this time). SHLD implied volatility is more around 55% (taking the last two years). Putting this into the Black/Scholes formula, the call price should be around $19 or am I missing something? (Not that I'd personally use Black/Scholes or similar formulas to value anything…)

[jmp8822]

I find the bonds interesting as well, or perhaps the rights first and foremost.  It seems you can exercise the rights for $500, which gives you a $500 face bond ($40 annual coupon), get 17.5 warrants which should be worth $10-$15 each.  17.5 warrants X $12.5 each is about $220.  I could sell the warrants and have a $500 Holdings bond for a net of $280, paying a $40 coupon, or about 14% yield, with a much higher YTM.  Or you could sell a 1 year call option on holdings for maybe $10 and keep the warrants for upside after January 2016.  You could repeat this process if the common didn't depreciate.  The prices don't seem to add up, unless the new bonds are actually going to trade at 56 cents of $1 par.

 

Ok. This is crazy. I sold my SHLD position and bought SHLDZ for the proceeds.

 

Maybe I didn't quite follow,  don't you need to factor in the $175 you pay for the SHLDZ?

 

So the yield is 40/(280+175)=8.7%, not 40/280=14%?

 

You're right. Not so crazy, after all.

 

Glad that we agree on that.  ;) Even for us who don't spend the $175 to buy the SHLDZ, the yield is not  40/280=14% because we indirectly "paid" for the $175 by suffering a drop in SHLD's share price.

 

I see it as you pay $660 today ($160 for the SHLDZ right and $500 to exercise it) and every year you get $40 while you wait (40/660 = 6% return) and in 5 years you end up with 17.6 shares (by rolling over the $500 bond to exercise the warrants). 

 

So, for $660 you get a 6% return annually and 17.6 shares ($37.71 a share) at the end of the 5 yr term.

 

Or, you could just use your $660 to buy 18.85 shares today at $35/share.  This way if there's more rights distributions, etc. you participate in them.  Just owning the warrants might not allow participation in all future corporate actions.

 

Yes - my mistake - I was looking at the Sears Canada rights not the Holdings rights, where the Sears Canada rights are trading for pennies.  Of course there are separate rights trading at the same time.

[heth247]

Or, you could just use your $660 to buy 18.85 shares today at $35/share.  This way if there's more rights distributions, etc. you participate in them.  Just owning the warrants might not allow participation in all future corporate actions.

 

That's a good point. In the extreme case, Eddie could be spinning off more valuable assets and keeps the SHLD price unchanged at $28 in 5 years, leaving the warrants worthless.

 

But again, he and BB will be owning those warrants too...

[ni-co]

Or, you could just use your $660 to buy 18.85 shares today at $35/share.  This way if there's more rights distributions, etc. you participate in them.  Just owning the warrants might not allow participation in all future corporate actions.

 

That's a good point. In the extreme case, Eddie could be spinning off more valuable assets and keeps the SHLD price unchanged at $28 in 5 years, leaving the warrants worthless.

 

But again, he and BB will be owning those warrants too...

 

Except that, in this event, the strike price will be adjusted:

 

In case the Company shall fix a record date for the making of a distribution to all holders of shares of its Common Stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding Ordinary Cash Dividends, dividends of its Common Stock and other dividends or distributions referred to in Section 12(A)), in each such case, the Exercise Price in effect prior to such record date shall be reduced immediately thereafter or at such later date as the Board of Directors may determine for purposes of the determination of Fair Market Value (but in any event not later than 10 business days after the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution) to the price determined by multiplying the Exercise Price in effect immediately prior to the reduction by the quotient of (x) the Market Price of the Common Stock on the last trading day preceding the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the Fair Market Value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of Common Stock divided by (y) such Market Price on such date specified in clause (x); such adjustment shall be made successively whenever such a record date is fixed. In such event, the Warrant Share Number shall be increased to the number obtained by multiplying the Warrant

 

http://www.sec.gov/Archives/edgar/data/1310067/000119312514388191/d806570dex44.htm

[heth247]

Though, I'd say the warrants are worth significantly more. A $15 call price's implied volatility is 27% (if my math is right this time). SHLD implied volatility is more around 55% (taking the last two years). Putting this into the Black/Scholes formula, the call price should be around $19 or am I missing something? (Not that I'd personally use Black/Scholes or similar formulas to value anything…)

 

I know little about options. But somebody mentioned several days ago that warrants could be worth $20~$25.

 

[heth247]

 

Except that, in this event, the strike price will be adjusted:

 

In case the Company shall fix a record date for the making of a distribution to all holders of shares of its Common Stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding Ordinary Cash Dividends, dividends of its Common Stock and other dividends or distributions referred to in Section 12(A)), in each such case, the Exercise Price in effect prior to such record date shall be reduced immediately thereafter or at such later date as the Board of Directors may determine for purposes of the determination of Fair Market Value (but in any event not later than 10 business days after the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution) to the price determined by multiplying the Exercise Price in effect immediately prior to the reduction by the quotient of (x) the Market Price of the Common Stock on the last trading day preceding the first date on which the Common Stock trades regular way on the principal national securities exchange on which the Common Stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the Fair Market Value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of Common Stock divided by (y) such Market Price on such date specified in clause (x); such adjustment shall be made successively whenever such a record date is fixed. In such event, the Warrant Share Number shall be increased to the number obtained by multiplying the Warrant

 

http://www.sec.gov/Archives/edgar/data/1310067/000119312514388191/d806570dex44.htm

 

That's a good find, thanks. Makes more sense.  Sounds like buying warrants in one of those future volatile days maybe a good way to long SHLD?

 

[ni-co]

Though, I'd say the warrants are worth significantly more. A $15 call price's implied volatility is 27% (if my math is right this time). SHLD implied volatility is more around 55% (taking the last two years). Putting this into the Black/Scholes formula, the call price should be around $19 or am I missing something? (Not that I'd personally use Black/Scholes or similar formulas to value anything…)

 

I know little about options. But somebody mentioned several days ago that warrants could be worth $20~$25.

 

Yes, ~$19-20 sounds about right to me. Where is ERICOPOLY when we need him?  ;)

 

In this case you'd pay $342 to receive $40 every year: 40/(675 - 17.5 × 19) = 11.7% (or 12.3% with $20 for the warrants).

[ni-co]

I'm primarily interested in the warrants. The way I look at it is: I pay $675, get a $500 bond and 17.5 warrants. Now, if I'm able to sell the bonds for $500, I will have paid $10 for each warrant. So I buy warrants worth $19 (according to EMH, worth much more to me) for $10.

[Guest wellmont]

i think you hit on the key words: "if I am able to" I would think these warrants and the bonds are going to be sold because eddie has wrapped a package that is going to be "re-gifted". the counter argument is that there may be weird goings on pushing this stuff up because of the shorts involvement.

[ni-co]

i think you hit on the key words: "if I am able to"

 

Yes. I realize that the SHLD bonds trade at higher YTM.

[Luke 532]

Now, if I'm able to sell the bonds for $500

 

Check with your broker if you even can sell the bonds at all.  They are transferable but won't be listed on an exchange, whereas the warrants are transferable and will be listed on an exchange.  Retail investors can't sell the bonds at Interactive Brokers as they have to be traded private party, and they don't deal with those transactions.  Your account size won't matter as a 7-figure account made no difference in their policy.

 

I would love to oversubscribe to the offering, sell the debt, and keep the warrants.  If anybody knows how I can somehow work around this and sell the debt please let me know.  Not very happy with Interactive Brokers right now.

 

I've considered shorting another form of debt that is on an exchange to offset the debt I'd be forced to own.

[Guest wellmont]

Now, if I'm able to sell the bonds for $500

 

Check with your broker if you even can sell the bonds at all.  They are transferable but won't be listed on an exchange, whereas the warrants are transferable and will be listed on an exchange.  Retail investors can't sell the bonds at Interactive Brokers as they have to be traded private party, and they don't deal with those transactions.  Your account size won't matter as a 7-figure account made no difference in their policy.

 

I would love to oversubscribe to the offering, sell the debt, and keep the warrants.  If anybody knows how I can somehow work around this and sell the debt please let me know.  Not very happy with Interactive Brokers right now.

 

I've considered shorting another form of debt that is on an exchange to offset the debt I'd be forced to own.

 

once they hit they IB account look for a broker that deals in bonds and can trade them. xfer the bonds there.  I would look at the bigger firms....

[Luke 532]

once they hit they IB account look for a broker that deals in bonds and can trade them. xfer the bonds there.  I would look at the bigger firms....

 

Thanks

[Luke 532]

Looks like SHLDZ hit accounts last night.

[ni-co]

Good article by Matt Levine on the offering:

http://www.bloombergview.com/articles/2014-10-30/sears-has-a-deal-to-offer-its-shareholders

 

(Though, I think that the volatility of SHLD is much higher than 35%…)

 

As he says, the shorts need to buy these rights. I'm very curious where they will be trading next week.

[chetster]

I couldn’t find this mentioned anywhere.  I found it interesting for a variety of reasons.

 

http://www.memphisdailynews.com/news/2014/nov/1/digest/

 

“Sears Secures $7.3 Million Loan on East Memphis Store

The parent company of Sears has taken out a $7.3 million loan on the store at 4570 Poplar Ave. in East Memphis, part of a broader effort to pump hundreds of millions into the struggling retailer.

Sears Roebuck and Co. secured the $7.3 million loan on the property fromJPP II LLC, which is affiliated with ESL Investments Inc., according to an Oct. 22 deed of trust.

ESL Investments is fully-owned by Sears chairman and CEO Edward S. Lampert, who is providing the cash infusion.

In September, Sears tapped two entities affiliated with ESL for a short-term loan of $400 million. The loan was collateralized by 25 Sears stores, including the one in East Memphis.”

[BTShine]

I couldn’t find this mentioned anywhere.  I found it interesting for a variety of reasons.

 

http://www.memphisdailynews.com/news/2014/nov/1/digest/

 

“Sears Secures $7.3 Million Loan on East Memphis Store

The parent company of Sears has taken out a $7.3 million loan on the store at 4570 Poplar Ave. in East Memphis, part of a broader effort to pump hundreds of millions into the struggling retailer.

Sears Roebuck and Co. secured the $7.3 million loan on the property fromJPP II LLC, which is affiliated with ESL Investments Inc., according to an Oct. 22 deed of trust.

ESL Investments is fully-owned by Sears chairman and CEO Edward S. Lampert, who is providing the cash infusion.

In September, Sears tapped two entities affiliated with ESL for a short-term loan of $400 million. The loan was collateralized by 25 Sears stores, including the one in East Memphis.”

 

That is really interesting.

 

[txlaw]

I couldn’t find this mentioned anywhere.  I found it interesting for a variety of reasons.

 

http://www.memphisdailynews.com/news/2014/nov/1/digest/

 

“Sears Secures $7.3 Million Loan on East Memphis Store

The parent company of Sears has taken out a $7.3 million loan on the store at 4570 Poplar Ave. in East Memphis, part of a broader effort to pump hundreds of millions into the struggling retailer.

Sears Roebuck and Co. secured the $7.3 million loan on the property fromJPP II LLC, which is affiliated with ESL Investments Inc., according to an Oct. 22 deed of trust.

ESL Investments is fully-owned by Sears chairman and CEO Edward S. Lampert, who is providing the cash infusion.

In September, Sears tapped two entities affiliated with ESL for a short-term loan of $400 million. The loan was collateralized by 25 Sears stores, including the one in East Memphis.”

 

Interesting.  It looks like the tax assessed value of the property is $2,279,280.