SHLDQ - Sears Holdings Corp

[Spekulatius]

Yes, there is value in redeveloping owned properties at about 150 to 250 a sq foot that is a huge bill. Per 1 million square foot that is a capital outlay of between 150 and 250 million. Btw. As of march 2016 SRG had another 33 million sq feet to go before the JV requirements. If for some reason SHLD goes chapter 7 soon, SRG will have to find $6 billion plus and the people to redevelop which isn't easy in itself. Naturally they will have to either sell properties outright or JV with other developers. But what happens if rents do not hold up because of continued mall sales deterioration and because 1500 plus stores hit the market at the same time?

 

On the BK, I am sure Eddie L will not lose money. He will find a way to profit I believe.

 

SHLD going into Chapter 7 does not necessarily mean that all stores will close.

[peridotcapital]

Talk of a Chapter 7 filing does not at all make sense in light of what Eddie has been doing. He has been orchestrating a slow liquidation himself for how many years now? If he was going to file BK, why bother doing all of this? Why announce less than a month ago that you intend to market a real estate portfolio of $1 billion? Why negotiate a Craftsman deal that carves out special terms for in-store tool sales at company-owned stores for years into the future? Why sell 5 stores to CBL and keep them open with a new long-term lease, instead of just closing all 5 right away and getting more upfront cash for them? Can anyone explain why a planned BK filing in 2017 or 2018 makes sense in this context?

[walt373]

They are losing money so quickly that it kind of makes discussion of their property value unimportant, doesn't it?

 

There is a pile of money on fire and you guys are debating how large the pile is. Uh, when and how is the fire going to be put out?

[scorpioncapital]

" If for some reason SHLD goes chapter 7 soon, SRG will have to find $6 billion plus and the people to redevelop which isn't easy in itself."

 

SHLD is paying SRG $150m in rent per year, why would the end of this stream from bankruptcy result in $6 billion costs? I would imagine it would result in $150m per year cost to replace the same stream of income.

 

[Candyman1]

" If for some reason SHLD goes chapter 7 soon, SRG will have to find $6 billion plus and the people to redevelop which isn't easy in itself."

 

SHLD is paying SRG $150m in rent per year, why would the end of this stream from bankruptcy result in $6 billion costs? I would imagine it would result in $150m per year cost to replace the same stream of income.

 

Well in case of a SHLD chapter 7 filing, SRG would lose the revenue stream from SHLD it would also be on the hook for the NNN payments that SHLD currently makes. SRG would get the properties put back to it in a short period of time, based on March 2016 numbers it would be between 30 and 33 million sq feet. I do not believe SRG would have much of a claim in BK. Now the argument is that the value is in the redevelopment of the SRG properties. Well in order to redevelop the properties so SRG can create value it would have to come up on short order with at least $6 billion in order to extract the value through redevelopment. One cannot make the argument that the properties will generate the increased rents without redeveloping them. Now there are other routes, but those limit SRG's ability to extract most of the value out of the properties. SPG or PPG or MAC, etc aren't going to buy the properties from SRG at the full value that comes from SRG redeveloping the properties itself. Buyers will want to generate a 10% return themselves. So either SRG sells the properties and extracts a limited amount of value or it comes up with the $6 billion for redevelopment and extracts all the value. I think SRG will not be able to pony up the needed money for redevelopment and it will have to do distressed deals in order to survive.

[Candyman1]

They are losing money so quickly that it kind of makes discussion of their property value unimportant, doesn't it?

 

There is a pile of money on fire and you guys are debating how large the pile is. Uh, when and how is the fire going to be put out?

 

Couldn't have said it any better.

[Candyman1]

Talk of a Chapter 7 filing does not at all make sense in light of what Eddie has been doing. He has been orchestrating a slow liquidation himself for how many years now? If he was going to file BK, why bother doing all of this? Why announce less than a month ago that you intend to market a real estate portfolio of $1 billion? Why negotiate a Craftsman deal that carves out special terms for in-store tool sales at company-owned stores for years into the future? Why sell 5 stores to CBL and keep them open with a new long-term lease, instead of just closing all 5 right away and getting more upfront cash for them? Can anyone explain why a planned BK filing in 2017 or 2018 makes sense in this context?

 

SHLD is blowing through 1.5 billion in cash plus now a year. SHLD sells approximately 45 for every 100 dollars it sold in 2005. I think about what the prospects for a turn around are and to me they are non existent. You still have to convince a judge that there is a case for continued business to be made. Please tell me how the cash bleeding stops? I do not see it. I also do not see how that ends after a chapter 11 filing. Some went through the SRG stores and noted that a lot of the stores were EBITDA profitable. Until I checked the Master Lease document and those numbers did not include much of the overhead. Footnote 5 it states the following. “Overhead structure not generally allocated to property operating statements. Primarily includes: Corporate office (finance, accounting, HR, inventory, merchandising, IT, business leadership, etc.) and regional management.” And that assumes that the SSS decline has not continued at a horrendous rate. If you include the overhead then most of the SRG stores ended up being EBITDA negative.

Here are two more thoughts:

- In order to get a 100% profit on the stock bought now, you need $8.5 billion in assets (mostly real estate and the brands) to be sold in order to make money by the end of 2017 according to my expected conservative losses assuming you shut down and sell all the assets by Jan 1 2018. Highly unlikely that SHLD has that many assets. It also excludes that closing the last 1500 stores outside of BK costs at least 1.5 billion.

- Or if you want to keep the stores open, then SHLD will have to improve its operating margin by 13.6% in order to get to a 2% operating margin. Since the total margin for WMT was 3.5% in Q3 2016 I'd call that a huge challenge.

 

Could it be that Eddie L has been wrong all along when it comes to SHLD? To me it certainly looks that way. Just since 2012 SHLD had to generate $12 billion in liquidity just to keep going. I believe Eddie L has stubbornly held on thinking he could fix SHLD which after more than a decade looks obvious it has not worked nor is it likely to fix itself now. 

 

Addressing your specific thoughts:

"He has been orchestrating a slow liquidation himself for how many years now?" And where has the money gone? Most of it has gone down into the black hole of losses at SHLD.

"Why announce less than a month ago that you intend to market a real estate portfolio of $1 billion?" Because SHLD needs cash urgently as it is expected to lose $1.8 billion in cash in 2017 according to the ratings agencies, an assessment I agree with. Also SHLD has to pay back the Cascade loan soon. It is also highly likely in my eyes that SHLD is having a harder time getting credit. At the end of Q3 there still was 1.5 billion in merchandise payables on the balance sheet. Given that ESL organized a letter of credit facility is a sign that it is getting harder to get credit.

"Why negotiate a Craftsman deal that carves out special terms for in-store tool sales at company-owned stores for years into the future?" Maybe that was the only deal available. I do believe that ESL still thinks they can turn the ship. Often it is hard to see the true problem when you are sitting in the middle of the problem.

"Why sell 5 stores to CBL and keep them open with a new long-term lease, instead of just closing all 5 right away and getting more upfront cash for them?" First thing I noticed on this deal is that SHLD gave a $5 million rent on the stores sold to CBL. The only way SHLD is able to stay in business is because it had below market real estate costs. So why does SHLD now offer a market rent and 7% cap rate to CBL? Because it needs the cash urgently I believe. No way those stores can be profitable with those rents. From CBL's perspective it is a perfect deal. They get paid market rent with a 7% cap rate until SHLD goes out of business or they recapture the stores ... in both cases they get to control the real estate in their malls. From SHLD's perspective it says, "we need the cash now and if we go BK then the 7% cap rate will not matter much".

 

Anyway, I still don't see why there would be a reason for Sears and Kmart to exist. The hole is too deep and the cash burn is too large.

 

[Candyman1]

Yes, there is value in redeveloping owned properties at about 150 to 250 a sq foot that is a huge bill. Per 1 million square foot that is a capital outlay of between 150 and 250 million. Btw. As of march 2016 SRG had another 33 million sq feet to go before the JV requirements. If for some reason SHLD goes chapter 7 soon, SRG will have to find $6 billion plus and the people to redevelop which isn't easy in itself. Naturally they will have to either sell properties outright or JV with other developers. But what happens if rents do not hold up because of continued mall sales deterioration and because 1500 plus stores hit the market at the same time?

 

On the BK, I am sure Eddie L will not lose money. He will find a way to profit I believe.

 

SHLD going into Chapter 7 does not necessarily mean that all stores will close.

 

Sure we are all permitted to dream aloud. Keeping a retailer like Sears or Kmart open isn't just an issue of just the stores, there is a whole infrastructure and overhead built around it. The losing stores also carry those costs. You close most of the stores and the few that are left will not be able to carry the DC and overhead expenses. I am fine to look at the idea of a Chapter 11 filing, but when a Chapter 7 filing happens it is game over.

[peridotcapital]

Addressing your specific thoughts:

"He has been orchestrating a slow liquidation himself for how many years now?" And where has the money gone? Most of it has gone down into the black hole of losses at SHLD.

"Why announce less than a month ago that you intend to market a real estate portfolio of $1 billion?" Because SHLD needs cash urgently as it is expected to lose $1.8 billion in cash in 2017 according to the ratings agencies, an assessment I agree with. Also SHLD has to pay back the Cascade loan soon. It is also highly likely in my eyes that SHLD is having a harder time getting credit. At the end of Q3 there still was 1.5 billion in merchandise payables on the balance sheet. Given that ESL organized a letter of credit facility is a sign that it is getting harder to get credit.

"Why negotiate a Craftsman deal that carves out special terms for in-store tool sales at company-owned stores for years into the future?" Maybe that was the only deal available. I do believe that ESL still thinks they can turn the ship. Often it is hard to see the true problem when you are sitting in the middle of the problem.

"Why sell 5 stores to CBL and keep them open with a new long-term lease, instead of just closing all 5 right away and getting more upfront cash for them?" First thing I noticed on this deal is that SHLD gave a $5 million rent on the stores sold to CBL. The only way SHLD is able to stay in business is because it had below market real estate costs. So why does SHLD now offer a market rent and 7% cap rate to CBL? Because it needs the cash urgently I believe. No way those stores can be profitable with those rents. From CBL's perspective it is a perfect deal. They get paid market rent with a 7% cap rate until SHLD goes out of business or they recapture the stores ... in both cases they get to control the real estate in their malls. From SHLD's perspective it says, "we need the cash now and if we go BK then the 7% cap rate will not matter much".

 

Anyway, I still don't see why there would be a reason for Sears and Kmart to exist. The hole is too deep and the cash burn is too large.

 

My question is, given that everything you said is correct, why hasn't Eddie filed BK yet? Why sell off the real estate and then file? Kmart filed without selling off their real estate first "just because they needed money." The only answer that seems rational is that he actually has no plans to file BK. I have to assume, given the last 10 years, that he would be well aware if he was going to be forced to file BK in the next 12-18 months. And in that case, he would be making decisions now in that context. He might not have a clue about running a retailer, but he's not an idiot generally speaking.

 

In terms of the cash burn, it is reasonable to think he could cut it drastically if he keeps down this path. Pension contributions and debt service account for about half the cash burn, so the actual retail operation itself burns the other half, but that figure is going to trend down as more stores close.  No reason to think he could not have retail cash burn under $500M in 2018. I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt), I just don't think he is going to file in the next 12-18 months because everything he is doing seems pointless if a filing is in the cards. There is no reason to burn this much cash year after year when he could have been in control of a BK restructuring long ago.

[BeerBBQ]

I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt)

 

At this point what are the major risks to the 2017 debt (6.875% 10/15/17)?

[peridotcapital]

I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt)

 

At this point what are the major risks to the 2017 debt (6.875% 10/15/17)?

 

The only one I see is a full or partial (subsidiary-specific) restructuring within the next 9 months. I am long the debt because Eddie's actions, plus his words (every chance he and his spokespeople get they make a point to say they are fulfilling all of their obligations), indicate to me that his goal is to slowly liquidate the company outside of court and wind up with a group of smaller self-sufficient businesses. Whether it works, who knows, but I don't see him filing between now and October because of the PR damage (the SRAC notes due 10/2017 represent only ~$40M of principal amount).

 

 

[walt373]

I just don't think he is going to file in the next 12-18 months because everything he is doing seems pointless if a filing is in the cards.

 

You don't think the fraudulent conveyance window for SRG ending in July is a real issue? It may be worth it to hold off BK for a few months to mitigate that risk. But I think the cost of going through another holiday season may be too much. There is also a $500m loan due in July.

[Candyman1]

Addressing your specific thoughts:

"He has been orchestrating a slow liquidation himself for how many years now?" And where has the money gone? Most of it has gone down into the black hole of losses at SHLD.

"Why announce less than a month ago that you intend to market a real estate portfolio of $1 billion?" Because SHLD needs cash urgently as it is expected to lose $1.8 billion in cash in 2017 according to the ratings agencies, an assessment I agree with. Also SHLD has to pay back the Cascade loan soon. It is also highly likely in my eyes that SHLD is having a harder time getting credit. At the end of Q3 there still was 1.5 billion in merchandise payables on the balance sheet. Given that ESL organized a letter of credit facility is a sign that it is getting harder to get credit.

"Why negotiate a Craftsman deal that carves out special terms for in-store tool sales at company-owned stores for years into the future?" Maybe that was the only deal available. I do believe that ESL still thinks they can turn the ship. Often it is hard to see the true problem when you are sitting in the middle of the problem.

"Why sell 5 stores to CBL and keep them open with a new long-term lease, instead of just closing all 5 right away and getting more upfront cash for them?" First thing I noticed on this deal is that SHLD gave a $5 million rent on the stores sold to CBL. The only way SHLD is able to stay in business is because it had below market real estate costs. So why does SHLD now offer a market rent and 7% cap rate to CBL? Because it needs the cash urgently I believe. No way those stores can be profitable with those rents. From CBL's perspective it is a perfect deal. They get paid market rent with a 7% cap rate until SHLD goes out of business or they recapture the stores ... in both cases they get to control the real estate in their malls. From SHLD's perspective it says, "we need the cash now and if we go BK then the 7% cap rate will not matter much".

 

Anyway, I still don't see why there would be a reason for Sears and Kmart to exist. The hole is too deep and the cash burn is too large.

 

My question is, given that everything you said is correct, why hasn't Eddie filed BK yet? Why sell off the real estate and then file? Kmart filed without selling off their real estate first "just because they needed money." The only answer that seems rational is that he actually has no plans to file BK. I have to assume, given the last 10 years, that he would be well aware if he was going to be forced to file BK in the next 12-18 months. And in that case, he would be making decisions now in that context. He might not have a clue about running a retailer, but he's not an idiot generally speaking.

 

In terms of the cash burn, it is reasonable to think he could cut it drastically if he keeps down this path. Pension contributions and debt service account for about half the cash burn, so the actual retail operation itself burns the other half, but that figure is going to trend down as more stores close.  No reason to think he could not have retail cash burn under $500M in 2018. I'm not arguing the equity is a good play here (I'm long the '17 and '18 debt), I just don't think he is going to file in the next 12-18 months because everything he is doing seems pointless if a filing is in the cards. There is no reason to burn this much cash year after year when he could have been in control of a BK restructuring long ago.

 

Not fully getting the use of your math here. So lets say the loss is $1.8 billion. $900 million is interest and pension and other losses. $900 million is operational retail losses. Then you offer up that SHLD can improve things and have retail losses of only $500 million by 2018. So I guess SHLD will only have $1.4 billion left in losses to cover going forward. Not sure why that is supposed to sound as a positive. Sound a little to me like a 400 lbs person that loses 20 lbs and feels he has made progress. Yes he has, but he is still so overweight he will likely die not too long from now.

 

The mistake I see many people make is that they seem to think in static terms when it comes to SHLD. That is why I keep reminding people of the SSS as an indication of how horrible the economics are working out. Eddie is trying to catch a falling knife. Yes he closes up a lot of stores and still the SSS decline has continued unabated. Every year SSS get worse and every year more stores start losing money. He closes the worst stores, but then the situation at the open stores deteriorates and he has to start all over again. For years I have heard people say that after the money losing stores are closed there will be a core group of profitable stores. But every year stores close and the situation continues to deteriorate. At this time SHLD has gone way past the point of no return I believe, certainly to allow the equity to survive.

I see the same static thinking around SRG. Look at all the retail locations they own. Many aren't seeing the retail situation for big boxes getting worse year after year. They ignore the cost to redevelop and the talent needed to do the work. Talent that SRG does not have at this time. I know someone that is very close to that situation. Developing large amounts of real estate demands a lot of talented people. For example look at the Santa Monica store. People are exited about that store and it is a very valuable piece of real estate. But from talking to someone that had developed in that area and knows that property very well, he believes they will be able to cash flow that property at its earliest if they wish to change the use which maximizes in about 8 to 10 years. That is how long it takes to do a large project like that in Santa Monica. It is truly nightmarish he told me.

Especially in the scenario when SHLD would close down I find the static thinking overwhelming. There will be 1500 stores that will hit the market at the same time. SRG will lose the rent revenue and NNN payments from SHLD. At the same time it will get 33 million square feet dropped in its lap, all the while SRG has not yet finished one store redevelopment yet. If for some reason SHLD closes down in the next year it will be a shitshow at SRG. Now there are alternatives, but I often seen people believe that it won't be a big deal. SHLD closing down would be a huge deal for SRG.

 

Why is Eddie L behaving this way? No idea. When I see his presentations I scratch my head too. They are completely disconnected from reality. He talks about all his great internet/member initiatives, but then spends no money on capex. Per store SHLD spends I think one sixth of Target. Or to look at it another way WMT spends 10 times as much on capex just for its internet initiatives then SHLD spends on capex on its entire business. Still Eddie acts as if SHLD is on the edge of making a break through ... which never comes.

Or think about it another way. Eddie seems to me obsessed about turning around SHLD. The guy had more than 10 billion under management, all the money is gone. If he would have pulled the plug on SHLD years ago he would have done much better. But because he was so obsessed with SHLD, investors have redeemed. I do not give anymore credit to what Eddie L thinks or does.

Someone I know sat in on a dinner with Munger in 2005 where Munger said off the cuff that Eddie was going to get his head handed to him on SHLD. Amazing how correct Munger was. It is obvious the SHLD is sinking Eddie's ship, but he won't admit it. The weird thing is not why is Eddie acting the way he is currently, the question to ask is why did a smart guy like him not see what was obvious to others so many years ago.

 

I cannot give certainty around the timing of a chapter 7 filing for SHLD, but I do have high conviction that it is only a question of when.

[benhacker]

I'm still really curious / waiting here how folks are shorting SHLD, I'm interested to know what the most mis-priced part of the capital structure is for those wishing to express that view. 

 

I think regardless of SHLD view, there is a capital structure arb lurking somewhere in the stock / options / SSF / bonds... for sure.

 

Cheers,

 

 

[peridotcapital]

You don't think the fraudulent conveyance window for SRG ending in July is a real issue? It may be worth it to hold off BK for a few months to mitigate that risk. But I think the cost of going through another holiday season may be too much. There is also a $500m loan due in July.

 

No, I see no reasonable argument for fraudulent conveyance. They made a tender offer for the 2018 HoldCo notes right after the spin. What other noteholders would sue? Eddie and Bruce own most of the debt anyway.

 

Section 4.24 Fraudulent Conveyance. Neither Borrower nor JV Pledgor has entered into the Transaction or any of the Loan Documents with

the actual intent to hinder, delay or defraud any creditor. Each of Borrower and JV Pledgor has received reasonably equivalent value in exchange

for its obligations under the Loan Documents. On the Closing Date, the fair salable value of Borrower’s and JV Pledgor’s aggregate assets (as

applicable) is and will, immediately following the making of the Loan and the use and disbursement of the proceeds thereof, be greater than its

probable aggregate liabilities (including subordinated, unliquidated, disputed and Contingent Obligations). The aggregate assets of Borrower and

JV Pledgor (as applicable) do not and, immediately following the making of the Loan and the use and disbursement of the proceeds thereof will not,

constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Neither Borrower nor JV Pledgor

intends to, and does not believe that it will, incur debts and liabilities (including Contingent Obligations and other commitments) beyond its ability

to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower).

 

[BeerBBQ]

FWIW:

 

SWK talked about general litigation risk as it related to the craftsman/SHLD transaction starting at the 24 minute mark

 

http://edge.media-server.com/m/p/uehngjgp/lan/en

 

They specifically address fraudulent conveyance at the 25:50 mark and said FC would only be an issue for them if at some point in the future it was determined that SHLD was insolvent at the time of the transaction and they don't think that to be the case based on everything they know now.

[walt373]

I'm still really curious / waiting here how folks are shorting SHLD, I'm interested to know what the most mis-priced part of the capital structure is for those wishing to express that view. 

 

I think regardless of SHLD view, there is a capital structure arb lurking somewhere in the stock / options / SSF / bonds... for sure.

 

Cheers,

 

What about 2018 and 2019 puts? The high borrow cost for shorting shares and squeeze risk make me like the puts.

 

If they do file, I expect the stock to fall under $1, or ~$100m market cap, which is probably higher than most bankrupt stocks.

 

$5 strike 2018 puts can be bought for under $2. So they double if Sears file by Jan 2018, implying ~50% chance. And personally I think the chance is way higher than that.

[benhacker]

Walt,

 

I think if you think the chance is >50% you short the '19 debt. Way more upside on a filing than the puts, and less downside.

 

I'm curious to hear a position someone actually has put money on (I may have interpreted wrong, but i didn't gather you have the position on)...  cause the short equity position at this level doesn't make sense to me.

 

I actually think the stock would keep $2-300m in cap in a filing and I'm interested in selling OOM puts. No position now though other than debt (long maturity srac)

[BeerBBQ]

Which long maturity SRAC and could you please provide a little explanation of rationale (or if you've explained previously, which post should I read)?

 

Thanks

[benhacker]

Here you go BBQ.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg285263/#msg285263

 

I was selling a bit of SSRAP above $11 when it was bid there recently.  It's now at $9.

 

I don't think it's a great bargain, but interesting.  Also note, that the underlying debt has compressed to $42 on $100 par, whereas SSRAP is now $36 on $100 par (with disadvantages - if you want to learn about those, print the Sears thread and search "ssrap" and you can see ScottHall and me talk about this security along with some others over the years)... so from a month ago, the relative bargain has compressed a bit.

 

Note that unlike equity, debt has some real interesting return characteristics and challenges for how you value it when it gets real cheap.  You need to essentially treat the way you value each coupon distinctly in very stress scenarios.  SSRAP current yield is 20%, and you don't pay for accrued interest... so you need to factor that in as it matters at 35% of par.... this is all a true thing regardless of SHLD or not... just things you need to think about.

 

Which long maturity SRAC and could you please provide a little explanation of rationale (or if you've explained previously, which post should I read)?

 

Thanks

[walt373]

Walt,

 

I think if you think the chance is >50% you short the '19 debt. Way more upside on a filing than the puts, and less downside.

 

I'm curious to hear a position someone actually has put money on (I may have interpreted wrong, but i didn't gather you have the position on)...  cause the short equity position at this level doesn't make sense to me.

 

I actually think the stock would keep $2-300m in cap in a filing and I'm interested in selling OOM puts. No position now though other than debt (long maturity srac)

 

I do have the position on but I am in the $8 strike puts which I bought a couple months ago. If you think downside is only to $200-300m mkt cap, you can consider a vertical put spread, for example buy the $8 strike and sell the $3 strike.

 

I don't feel like I know enough about the bonds to bet against them. I didn't understand why they were trading near par recently. What's the downside for the bonds if they file? 50%? 20%? Probably not 100%? I don't really know. But I think equity will probably be wiped out. And $800m still seems way too high to me for a company this close to bankruptcy. Basically I don't want to get too cute with this trade.

 

I believe (perhaps wrongly) that the earlier they file for bankruptcy, the better the recovery will be for all, since they can cancel leases and close stores, curtailing cash burn quicker. So maybe the bonds won't fall that much if they do it soon? But equity will probably still crash due to forced selling. That said, I will be selling my puts or hedging them with long stock into that forced selling. And I wouldn't be surprised if the stock bounces from there on the possibility of an equity committee forming.

 

But anyways, I think those puts may be profitable even if they don't file for bankruptcy, just from the stock falling as business continues deteriorating, making a future bankruptcy increasingly likely.

[benhacker]

Undertand Walt.  Thanks for the color.

 

I think the debt is the bigger class here and you need to have a pretty strong feel for it if you are going to be playing the options / stock.

 

You have 3 (basically) publicly tradable classes.

 

'17 SRAC

'18 Secured HoldCo

'19 Unsecured HoldCo

And '28 - '43 SRAC

 

SRAC is rated above HoldCo debt, and Secured HoldCo is above SRAC.  All debt is 1 rating apart...

 

Long term SRAC trading at 40% of par, near term issues trading from 87-95% of par (through '19).

 

Given the above information, the market is saying *strenuously* that a filing won't happen soon (through '19).  If it did, you could create a crazy trade -- short front end debt and long long term debt which would experience extreme pricing convergence upon a filing.... amazingly, this trade would be massively positive carry as well.

 

I hear you on the puts and doing what makes sense and picking your spots; but given the capital structure pricing today it's a very very inefficient way (my opinion) to express your view which while common on this board appears to be very divergent from debt securities' market participants.

 

Clearly the pricing could be due to yield / liquidity, or just plain insanity... but I think it's worth Sears bears doing a lot of work on the debt if you think a filing is imminent.  I may short the '19's just to hedge out my much higher yield SRAC position (given SSRAP structure, that would be a seriously dirty hedge though).

 

Just some thoughts.  Good luck (actually, I take that back...)

[walt373]

Thank you for the explanation on the debt. I agree that the near-term bonds are saying filing is not happening soon. To get there, it looks like one of two things has to happen. 1) The business turns around and stops burning cash so quickly, or 2) they continue doing what they've been doing, selling assets and borrowing money from Eddie to raise the cash so they can burn it.

 

I do not view option 1 as even remotely possible - I think they are in a death spiral and they are past the point of no return. I suppose you could say they will close all the bad stores and stabilize losses that way, but I think the operations are deteriorating faster than they can stem bleeding, even at the good stores. This is what I want to bet against.

 

Option 2 is possible, and they might make it all the way to when the bonds get paid off at par. But wouldn't that be an argument to not short the bonds? Because in this case, the bonds go to 100 while the stock would still probably be crushed as upside is sold off and they take on more liabilities, killing the SOTP long thesis.

 

In other words, short bonds is at least partially a bet on how long Sears/Eddie are willing to kick the can, while short stock is more of a bet on a turnaround in operations. The near-term bonds have an escape hatch but stock is in it for the long haul.

[benhacker]

I see your perspective better now.  In the "survive" and don't file mode from your view, you think the common goes to near zero anyway; than I agree the puts are the correct path.

 

Thanks!

[HalfMeasure]

Anyone have a read on current market sentiment? Pessimism as we approach Q4 earnings?