SHLDQ - Sears Holdings Corp

[valueinvestor82]

I think both are true, you have a point! Equity is certainly more variable, but credit still tends to lead the way.

[benhacker]

Credit markets didn't look very smart in 2008!

 

They seemed to me to me much more informed than equity markets... perhaps that was just my take though. (EDIT: I meant that in terms of recognizing issues earlier.  I think once risk heightened, I think debt markets broke down as buyers of debt weren't looking for equity like risk / return, so during 2008, debt provided insane bargains... so I'm not arguing efficient markets for debt or something, just saying debt sees issues sooner than equity, usually)

 

Personally, I think debt is a key area to follow in firms that are anywhere near / at risk of insolvency.  For healthy firms, the equity is the fulcrum security so should be the one that responds faster to new material information (general statement).

 

I think generally the more "intelligent" capital focuses near the fulcrum... sadly, on the way down for distressed firms, it seems, because equity guys don't generally do debt, they miss the fact that the fulcrum has moved (in the markets' mind or in reality) which can either give them a warning (to sell, revisit) and/or an opportunity to trade up the capital structure (more safety, similar returns).

 

You see this in many names once you start to look for it.  The fact that few investors really invest across the capital structure (see many examples on this board where folks are often oblivious to what debt market IRRs are for their firms), makes changes in firms value often ripe for capital structure arb as the reactions in each class can and will be very different.  Of course, this isn't really a hidden phenomenon, and you often see this message loud and clear by seeing the borrow costs on distressed stocks shoot up as arbs step in to "normalize" the structure.

 

I think this effect is compounded by the fact that a lot of money is either legally (IRA) or by mandate not allowed to use leverage, which makes the transition from debt to equity (or warrants) not so smooth for investors to choose from.  Basically leverage + options allows the ability to mimic different capital structures and risk profiles and without those tools, some inefficiencies may remain (example, warrants trade expensive generally because IRAs can't use margin, so using margin + common + puts may be cheaper than warrants, but that's not possible in IRAs or certain funds).

 

Kind of a tangent, sorry for pontificating.  I remember having an aha moment about this in Sears back in the day (early 2009, SHLD holders were laughing about people paying 30% to borrow the shares, but the long SRAC debt was paying 30% current income and trading at 25% of par... so perhaps those borrowing were actually being more rational than it seemed).

 

Cheers,

[Guest wellmont]

i have long term srac debt marked at 58c. these used to be listed baby bonds but now are in never never land / grey market.

[benhacker]

Yep wm, I own the same. Underlying notes trading at $0.75 though. Liquidity + lack of tender + ch 11 liquidation risk discount on ssrap of 20% exists which to me is far to high.

 

Underlying notes + cds are a truer credit risk price metric imo.

 

EDIT: at $0.58, you must mean the old SBCKO / SBCKP notes... those are in a similar boat as SSRAP (but with longer duration, and no Ch 11 liquidation / no tender risk that SSRAP has... but even worse liquidity and longer duration).  Can you trade those notes with any broker?

 

I think the underlying SRAC '27, '28, and '32 notes that are larger size and trade dealer to dealer are the best .  Those are trading $0.72-0.75 now - the others are basically untradable and carry a massive discount due to that (I think).  I think they (OTC dealer traded notes) go to par soon, or SHLD will tender.

[oddballstocks]

Yep wm, I own the same. Underlying notes trading at $0.75 though. Liquidity + lack of tender + ch 11 liquidation risk discount on ssrap of 20% exists which to me is far to high.

 

Underlying notes + cds are a truer credit risk price metric imo.

 

Pulled this guy up, I see 15.4 and par is 25, so 60% of par.  I'm intrigued..

 

I skimmed the covenants and prospectus.  The gist is this is completely unsecured debt from SRAC right? Says SRAC is owned by SHLD, but SHLD isn't guaranteeing them.  Also some strange language in there about events of default.  Appears these can be forced into default by whomever owned $100m worth of debt at the time?

 

Last question on this.  Can someone explain the swap? Why not exercise it and get rid of these things?

 

Is the trade here that these things are at 60% yet there's a swap protecting their value so they should really be at par?

[oddballstocks]

Looks like there's a bid out there at 12.25 as well from First Ballantyne.

[benhacker]

Oddball, I will avoid how SRAC debt relates to SHLD overall capital structure.  I think opinions differ.  But... it sounds like you are talking about the nature and structure of SSRAP itself (important) right?

 

So years ago, MS put some SHLD 7%, '32 debt into a box, and then sold exchange listed 7.25% '32 notes (really preferred, but without anything infront of them to get paid in the box).  The 7% to 7.25% move was made possible based on market price deltas at the time of creation (different between OTC / Dealer markets and exchange traded retail yield hogs) based on investor preference.

 

There is some language about what SSRAP does in the event of default of SRAC, but also some terminology about how / when MS can swap / call units in exchange for underlying value.

 

The swap described, doesn't allow MS to pay just any price to redeem SSRAP, they can only call (at Par+) or do the swap in special cases (like tenders).  So I think nothing they can do right now... but if you are asking a different question, let me know what you think exactly MS can do here...

 

Hope that helps. 

 

At it's core, SSRAP has several disadvantages vs. '32 7% underlying notes:

 

1) Illiquid - SSRAP trades OTC with pretty bad spreads.  It's not terribly more illiquid than dealer trading in the bonds, but it is a little more esoteric for those who are generally bond buyers.

 

2) Ch 11 - In the event of a SRAC filing, SSRAP terms will have the trust blow out the underlying notes and liquidate - this means you will likely get a shit price.  (my commentary, if SRAC files, you are getting $0 anyway).

 

3) Tenders - If Sears tenders (say) for SRAC notes at $0.80, you don't get to sell your SSRAP shares for $20... you are one step removed.

 

4) Call / Swap risks - IB's structure these deals so that in fringe cases, you get screwed (tenders, calls of the underlying, etc etc)... these are miner risks, but present (I'm speaking generally of the asset class of "baby" trust preferred stock bonds... oxymoron?)

 

It has one advantage:

 

1) 0.25% yield premium at par.

 

2) Maybe you could call buying it with a stock commission at certain brokers (vs. bond commissions which are sometimes higher) is a good thing too.

 

I just don't feel:

 

1) SRAC credit risk is properly priced @ $0.75

 

2) SSRAP added discount to SRAC is or should me another 15-20% off.  Maybe 5-10%.  The good news, is as SRAC closes in on par, the delta of SSRAP / SRAC should narrow quickly.

 

I've been long since 2009 at $6, so haven't reviewed prospectus recently, and likely am crazy biased.  Any thoughts you have are welcome.

 

Oh, and a side note, SSRAP trades flat, whereas underlying trade with accrued... SSRAP just went X-div yesterday, so that is something to watch if you compare pricing... pre-X date, SSRAP was stupid mispriced.

[benhacker]

Looks like there's a bid out there at 12.25 as well from First Ballantyne.

 

?

 

Are you talking about SSRAP, or the other notes ('42 / '43) There are bids much higher than that for SSRAP.  BxA is $15.40 x $15.90.

 

Unless you are talking about the other legacy notes (SBCKO / SBCKP were the old tickers) that now trade by CUSIP only... and have $25 face...

 

If you can buy that at $12.25, good on you... I bet the ask is $17 or something though.  Those notes are sexy if you can buy them....

[oddballstocks]

Looks like there's a bid out there at 12.25 as well from First Ballantyne.

 

?

 

Are you talking about SSRAP, or the other notes ('42 / '43) There are bids much higher than that for SSRAP.  BxA is $15.40 x $15.90.

 

Unless you are talking about the other legacy notes (SBCKO / SBCKP were the old tickers) that now trade by CUSIP only... and have $25 face...

 

If you can buy that at $12.25, good on you... I bet the ask is $17 or something though.  Those notes are sexy if you can buy them....

 

Excellent posts, I'm looking at SSRAP 7 1/4 32 Pfd's.

 

I have three quotes:

 

EXCH (Exchange Traded) 15.4/15.9

NYSE (US Composite) 15.4/15.9

FLBT (First Ballantyne) 12.25/17

 

I saw the language about liquidation.  My take was if these don't pay at par in 32 there aren't many scenarios where you get your money back outside of a takeover.

 

SRAC in general.. I see 5 equities, 5 corporates, 2 preferreds, 3 bank loans, 10 money markets and 38 CDS'

 

The 7% SRAC bonds appear to be the most liquid, a trade went through on the 9th.

 

Thinking out loud here, wonder why there's such a big pricing difference between the 6.5 and 6.75 28's?

 

Are you looking for mismatches between the CDS pricing and the bond pricing?  Seems like there is some opportunity there.  Not sure which is right per se.

 

My thought after blowing 45m on this is there seems to be some opportunity lurking in there if you dig hard enough.

 

You said SSRAP might be good if you can trade it?  Why can't you trade? Looks like there's a true bid/ask with some liquidity.

 

 

[benhacker]

Hey Nate,

 

Covering a lot of things, I'll break this down to make it ultra-clear as my prior posts weren't:

 

I saw the language about liquidation.  My take was if these don't pay at par in 32 there aren't many scenarios where you get your money back outside of a takeover.

 

100% agree.  You get coupons, but if these go tits up, you probably get 20% below market value of the 7% notes the following day as MS blows you out at the worst price.  I reiterate (and have said as much since the beginning of my investment here) that if SRAC files, you are screwed "regardless" being in SSRAP vs. SBCKO vs. '32 notes or whatever, won't matter.  The jig is up in that case. Normal credit analysis is very sensitive to recovery in default, but SHLD is a special beast.  It pays, or you are done... Eddie isn't leaving anything in a filing for little kids.

 

SRAC in general.. I see 5 equities, 5 corporates, 2 preferreds, 3 bank loans, 10 money markets and 38 CDS'

 

I don't know what all you can see... or how it shows in bloomie, but yes, it's a rich capital structure.

 

The 7% SRAC bonds appear to be the most liquid, a trade went through on the 9th.

 

Check FINRA / Morningstar directly, the SRAC bonds of almost all flavors trade daily or close to it…. Not liquid, have traded a bunch since the 9th.

 

Thinking out loud here, wonder why there's such a big pricing difference between the 6.5 and 6.75 28's?

 

Again, I'm not looking at your screen, but there is no fundamental difference.  The reason they trade apart at times, is just due to timing of the trades, and general liquidity.

 

Are you looking for mismatches between the CDS pricing and the bond pricing?  Seems like there is some opportunity there.  Not sure which is right per se.

 

I rarely look at CDS.  I don't have access to data sources on a regular basis, and I don't have the ability (legally or logistically) to trade them for myself / clients.  I would always take the larger market as the better / more accurate measure of price / value when in doubt.  Not sure of CDS volumes / outstanding... I think I asked Picasso about this back in the thread and got nothing.  On names like SRAC, I think CDS is mostly just traded one off to manipulate the common in times of news flow.  SRAC has a total of ~$350m (FACE) outstanding of notes across 5-6 issues… CDS shouldn’t exist on this in a natural market (IMO).

 

My thought after blowing 45m on this is there seems to be some opportunity lurking in there if you dig hard enough.

 

Certainly.  I can tell you where it is even.  It is in SSRAP, and also in the '42 and '43 long dated orphaned notes.  Hedging is hard because the stock is hard to borrow, and some would say it's mostly binary (this stock), so I think it's probably a small opportunity *unless* you view SHLD credit as being generally undervalued.  I have that view, and I think the SSRAP discount narrows soon as SRAC '17's are retired, and '32 gets a year or two closer.  We'll see.  Coupon is fine while I wait.

 

You said SSRAP might be good if you can trade it?  Why can't you trade? Looks like there's a true bid/ask with some liquidity.

 

No, SSRAP is easy to trade; I own it in size, and was buying pre-ex-div @$15.80.  It's the '42 and '43 notes which are hard to trade... I confused the issue by talking about both.  The '42 / '43 notes were direct exchange listed bonds that delisted - completely delisted (ticker was removed, they now trade as "bonds" via CUSIP).  I think they are super cheap (trading in the $14’s), but likely the commission to trade (if you can) is prohibitive, so it's just market makers stealing lunch money at this point...

 

2042 7% CUSIP 812404408

2043 7.4% CUSIP 812404507

 

Enjoy joining the esoteric fun that is SHLD's capital structure. :)

 

 

[BTShine]

Sears' spin-off Seritage released earnings today.  http://ir.seritage.com/file/Index?KeyFile=31850567

 

Interesting to see that the signed but not yet opened leases are averaging $18.95 PSF, existing 3rd party leases average $11.23 PSF and $4.31 PSF for Sears Holdings leases. 

[adesigar]

SHLD really trying to make ShopYourWay work. They added a lot of new benefits/partners to Shop Your Way. Currently totaling around 250

 

The big ones I noticed are (a lot of these are new partners)

 

Walmart - 3% back in Shop Your Way points

Target - 5% back in Shop Your Way points

Starbucks - 5%

Staples - 3%

Nordstrom - 5%

Macys - 5%

Lowes - 5%

Lenovo - 5%

Expedia - 5%

Disney Store - 5%

BestBuy - 3%

 

I also found about 25 restaurants in a 5 mile radius from my house that give ShopYourWay points. (im in small city 100,000 population). Some were chains like Buca, Burger King, Wendys, Popeyes and others just local places.

[Spekulatius]

Sears' spin-off Seritage released earnings today.  http://ir.seritage.com/file/Index?KeyFile=31850567

 

Interesting to see that the signed but not yet opened leases are averaging $18.95 PSF, existing 3rd party leases average $11.23 PSF and $4.31 PSF for Sears Holdings leases.

 

Anybody has a view on SRG's valuation? As I understand it, SRG owns some good real estate, partly through JV with other Reits, 88% of their rent income comes from Sears still, even though the rent that Sears pays is very low. However, the structure and the agreement with Sears is so complex (put pack option for Sears, lesser termination fees, redevelopment costs unknown) that I can't come up with a reasonable way of valuing the. Like SHOS, SRG is tied to Sears, so not a true spinoff in that sense, just a separate corporate structure tied together still. I am not inclined to buy, given Sears track record with spin offs, but I would like to hear some views, regarding valuation.

[bizaro86]

I own a but of SSRAP in a non registered account for a relative, but haven't been able to buy it at IB. Has anyone had success buying the baby bonds at IB?

 

Also, I'd be very interested in hearing SRAC capital structure opinions, or seeing links to various views. If I thought this was effectively SHLD debt I'd make it a big position.

 

 

[benhacker]

SSRAP is tradable at IB (now, it wasn't always this way).

 

I view SRAC obligations as senior to 8% holdco notes, slightly (similar to Moody's view).  In reality there is no difference IMO between the 9% or SRAC notes, they will all sink or swim together.

[bizaro86]

SSRAP is tradable at IB (now, it wasn't always this way).

 

I view SRAC obligations as senior to 8% holdco notes, slightly (similar to Moody's view).  In reality there is no difference IMO between the 9% or SRAC notes, they will all sink or swim together.

 

Thanks! I haven't tried for awhile, about two years ago I spent a month emailing IB customer service before giving up.

[PLynchJr]

Anyone getting tempted by the common?  Just a hair over $20 now.  Well below where Lampert and Berkowitz recently added.  I really should delete this off my watchlist before I'm tempted to do something I'll probably regret.  ;D

[valueyoda]

I can't imagine why anyone would want to add Sears or for that matter J.C. Penney at this point in the cycle. If best-in-class operators like Macy's with much better cash flow dynamics and strategically better positioned are facing headwinds and are trading at low valuations, it is almost despite cost cutting and debt reduction impossible for Sears Holdings to thrive from here. I am not sure whether the remaining value of real estate and the obviously impaired value for Sears Brands, Sears Autocenters en homeservices would provide enough margin of safety against the pension liabilities and debt at these levels, given the ongoing cash burn that will continue.

 

The thesis was very interesting pre-crisis, but starts to unravel now Sears is irreversibly damaged. Nor do I understand Berkowitz' NAV explanation of $100. The assumptions one has to make with regard to the remaining asset values are simply silly. I honestly think that Sears Holdings could get very close to the brink at the end of next recession. I used to be a great Lampert bull, but I have learned my lesson with both Sears and J.C. Penney over the last 8 years. I am looking at Macy's now as an attractive candidate, and would love to get bullish on both Gap and Dillards, but honestly think that those two companies will face more competitive presssures.

[valueinvestor82]

I disagree. Expectations are still far lower for JCP and SHLD. In fact, JCP (in real time, mind you) is beating the pants off of M, as reflected in their raised forecast (again) and beat last quarter. JCP fell to the depths during RJ and I think the argument can easily be made that their trajectory is far more positive than M, which is probably topped out in terms of market share and has more international currency exposure than domestic-focused JCP. Long JCP and SHLD.

[valueyoda]

I agree that J.C. Penney is currently doing relatively well and exceeding estimates. The question remains whether that tailwind can persist in a recessionary environment, especially since J.C. Penney is not a free cash flow generator and with a highly leveraged balance sheet.

[heth247]

Anyone getting tempted by the common?  Just a hair over $20 now.  Well below where Lampert and Berkowitz recently added.  I really should delete this off my watchlist before I'm tempted to do something I'll probably regret.  ;D

 

But didn't ESL, the hedge fund, just reduced their holdings of SHLD recently?

[wisdom]

Lampert has been a buyer. I believe he may have purchased as much as $30 mil worth of shares recently. The hedge fund may have distributed the SHLD shares as it reduce the number of investors it has from what I can recall.

[wisdom]

Looks like they have changed their website as well. Some new stuff to read that I had seen before -

http://searsholdings.com/invest/financial-transactions

 

[ni-co]

"Due to the structure of the leases, we expect that our cash rent obligations to Seritage and the Joint Venture partners will decline materially over time as space in these stores is recaptured. So, while the rent paid to Seritage and the Joint Venture partners is a real cash expense, we have chosen to exclude it here to provide a more consistent and comparable view of our operating performance."

 

They exclude all lease payments to Seritage in their adjusted EBITDA? Come on. This is really dishonest.

[merkhet]

"Due to the structure of the leases, we expect that our cash rent obligations to Seritage and the Joint Venture partners will decline materially over time as space in these stores is recaptured. So, while the rent paid to Seritage and the Joint Venture partners is a real cash expense, we have chosen to exclude it here to provide a more consistent and comparable view of our operating performance."

 

They exclude all lease payments to Seritage in their adjusted EBITDA? Come on. This is really dishonest.

 

Maybe it's signaling from ESL on the Seritage recapture pace?