SHLDQ - Sears Holdings Corp

[BeerBBQ]

 

 

Sure. I get that it's a real estate play, but if the company goes into bankruptcy, you want the debt which is

 

A) backed by the real estate and

B) to control the bankruptcy negotiations

 

If you own the debt, you can control the negotiations AND come out with an equity interest. I'm just blown away they're both still purchasing the equity. Like...what are we missing?

 

The easiest explanation for the equity purchases is that a BK is not imminent.  Everyone thinks a filing is imminent.  More specifically, in July, because the 2 year look back for the SRG deal expires.  I am not sure why a filing would be delayed due to concerns about the look back for that deal 2 years ago. From what I understand, one of the elements necessary for fraudulent conveyance is if the company was insolvent at the time of the transaction.  If they weren't insolvent a couple weeks ago when the craftsman deal closed (SWK specifically said they had no concerns about solvency), then how were they 2 years ago? Also, as long as the company continues paying its bills (as of 3/9/17, they probably had over $1B in cash and available borrowing capacity) who is going to force them into bankruptcy??  The lenders for the domestic credit agreement don’t seem to be too concerned about a near term filing because they continue to make adjustments to the agreement and just allowed a borrowing capacity increase. Also, at least one of the current directors (berkowitz) has a view that the equity is worth multiples of current share price (and has been backing that up with equity purchases) and if the full board shares a similar view, bond holders might have a tough time pressing their case - especially since ESL and Berkowitz own 43% of the total debt outstanding.  At this point, it seems like if they do file, it is because they want to file not because they have to file.   

 

Alternatively, maybe they believe that the equity value in a BK is substantially higher than current market price and they don't care about a near term BK filing. They clearly believe the equity has substantial value.  I think ESL/Berkowitz have a much different view on the value of the below market leases. In order to get to berkowtiz's estimate a year ago of $15B for total real estate value, he would have to have been valuing the leases at around $10B (assuming he was valuing the remaining owned real estate similar to those assets sold to SRG). I’m not saying his valuation is correct but he has very specific information to inform his valuation of those leases and I would guess that few others have the required info needed to make a reasonable valuation assessment. Having confidence in a value estimate for those leases is probably the key difference for those willing to purchase the equity.

 

[NBL0303]

 

The easiest explanation for the equity purchases is that a BK is not imminent.  Everyone thinks a filing is imminent.  More specifically, in July, because the 2 year look back for the SRG deal expires.  I am not sure why a filing would be delayed due to concerns about the look back for that deal 2 years ago. From what I understand, one of the elements necessary for fraudulent conveyance is if the company was insolvent at the time of the transaction.  If they weren't insolvent a couple weeks ago when the craftsman deal closed (SWK specifically said they had no concerns about solvency), then how were they 2 years ago? Also, as long as the company continues paying its bills (as of 3/9/17, they probably had over $1B in cash and available borrowing capacity) who is going to force them into bankruptcy??  The lenders for the domestic credit agreement don’t seem to be too concerned about a near term filing because they continue to make adjustments to the agreement and just allowed a borrowing capacity increase. Also, at least one of the current directors (berkowitz) has a view that the equity is worth multiples of current share price (and has been backing that up with equity purchases) and if the full board shares a similar view, bond holders might have a tough time pressing their case - especially since ESL and Berkowitz own 43% of the total debt outstanding.  At this point, it seems like if they do file, it is because they want to file not because they have to file.   

 

Alternatively, maybe they believe that the equity value in a BK is substantially higher than current market price and they don't care about a near term BK filing. They clearly believe the equity has substantial value.  I think ESL/Berkowitz have a much different view on the value of the below market leases. In order to get to berkowtiz's estimate a year ago of $15B for total real estate value, he would have to have been valuing the leases at around $10B (assuming he was valuing the remaining owned real estate similar to those assets sold to SRG). I’m not saying his valuation is correct but he has very specific information to inform his valuation of those leases and I would guess that few others have the required info needed to make a reasonable valuation assessment. Having confidence in a value estimate for those leases is probably the key difference for those willing to purchase the equity.

 

Great post.  I appreciate how you are considering these facts from numerous perspectives rather than just saying, "This is The Truth, no more discussion needed."

[Matson125]

Lampert is in for another 525,000 shares

 

http://secfilings.com/searchresultswide.aspx?link=2&filingid=11954546

[beaufort]

It makes sense to me that ESL and Berkowitz are buying if there is to be another rights offering to spin off more real estate, such as what was done with the Seritage spin. 

[TwoCitiesCapital]

I changed my mind on sears.  Bruce if you are reading this i apologize for throwing jabs earlier in the thread.  I am with you bro. 

 

Sears is not going bankrupt.  The only way sears goes bankrupt is if Eddie Lampert drives it to bankruptcy on purpose.  He would have to be insane.  Some people think he is, i don't.  He is something, and i don't know what exactly, but he is not insane.  I am not betting on him to be a good capital allocator, I am just betting that he is not insane.  That's all i need from him.

 

I am skeptically optimistic.  There are a lot of moving pieces here.  This is not a high conviction 50% of your portfolio play....I would have gone balls deep but I couldn't because there are uncertainties/information that only Ed (or maybe Bruce) know/have access to…so i have to respect the fact that my assumptions could be wrong.   

 

But I believe I do have enough information to play the probabilities.

 

If anybody knows how i could get in contact with the investor relations/the CFO PM me.  There is no contact info for investor relations….they don’t seem to want to talk to investors, and with all the drama around the company, I don’t blame them.

 

meant to say optimistic. went longer. 

 

anybody else here long?

 

I've been selling puts on it for the last 6-months and doing pretty well with that strategy. Obviously not as well as owning the underlying though. Have been considering stepping in here.

 

Quick question to all you bankruptcy experts. Sears Holdings owns three subsidiaries: Sears & Roebuck, K-Mart, and SRe (which owns the insurance subsidiary Sears Re). In the event of a failure to pay suppliers, employees, or creditors from one of the retail subs (Sears & Roebuck or K-Mart), can they go after a wholly different sub to make a claim?

 

Just trying to understand how a bankruptcy works at the holding co level to know if the assets in the insurance co are relatively safe from claims from Sears and/or Kmart. Also, not referencing the "bankruptcy remote" structure of the REMIC that we've been over and over.

[TwoCitiesCapital]

"Just can't recall if there's been discussion on what assets are in which subs and if those can be accessed by other subs in a bankruptcy scenario for one of them."

 

Pretty sure a lawyer answered this earlier in the thread and said the answer was generally yes and all the assets are fair game in case of bankruptcy, which makes sense...but i can't say one way or another bc i am not a lawyer. 

 

On a side note....EL and BB aren't buying the equity with the intention of it going to zero.  They aren't missing anything.  The market is.

 

I'm a little more skeptical.

 

I don't buy that EL and BB are just idiot blindly married to a position that has underperformed for them for years so they continue to throw good money after bad.

 

I similarly don't buy that SHLD is a gold mine worth $10B+ based on the value of its brands and real estate while they continue to burn hundreds of millions in cash and are failing in most every business segment.

 

The truth lies in the middle, but with a market cap nearing $1B and the vehicle of Seritage capable of purchasing more land from them to continue to help them limp along, it is an interesting play.

[aws]

The put pricing was extraordinary high.  Back in February I was able to sell June $4 puts for 67 cents each when the stock was trading at 6 something.  That was a pretty sweet premium, 20% profit so long as the stock didn't fall by more than a 3rd in 4 months.  Somehow they are still being quoted at 16 cents each which seems even more crazy.  Now they return almost 5% in a little over two months so long as the stock doesn't fall by more than two thirds.

[Spekulatius]

"Just can't recall if there's been discussion on what assets are in which subs and if those can be accessed by other subs in a bankruptcy scenario for one of them."

 

Pretty sure a lawyer answered this earlier in the thread and said the answer was generally yes and all the assets are fair game in case of bankruptcy, which makes sense...but i can't say one way or another bc i am not a lawyer. 

 

On a side note....EL and BB aren't buying the equity with the intention of it going to zero.  They aren't missing anything.  The market is.

 

The purchases are small and have resulted in a bump for the stock. It probably gives them more breathing room too with creditors and suppliers too, if the stock prices looks a bit better. Maybe there is another angle too it. EL sucks as a CEO, so I would thoroughly discount when he purchases stock, especially since he bought stock at way higher prices in the past. It's a different story with a CEO that seems to know what he is doing.

[stahleyp]

Goodhaven sold late last year and now the stock is up 40% this year. Isn't it considered a positive when they sold? They're long term track record (even for a value fund is terrible). Chou's US fund has a horrible record too but at least he has a good record in Canada. Goodhaven's track record is...working with Berkowitz.

[Spekulatius]

Goodhaven sold late last year and now the stock is up 40% this year. Isn't it considered a positive when they sold? They're long term track record (even for a value fund is terrible). Chou's US fund has a horrible record too but at least he has a good record in Canada. Goodhaven's track record is...working with Berkowitz.

 

I agreed... Goodhaven fellas seems to have very similar investment approach as P.Watsa.  ;D

 

Who knows, mayb Goodhaven did some tax loss harvesting. Depending on what their purchase price was, a position can be worth more dead than alive.

[BeerBBQ]

Do companies that are planning on filing BK in July normally make coupon payments in April? Or is there no information content in making coupon payments?

[NBL0303]

Do companies that are planning on filing BK in July normally make coupon payments in April? Or is there no information content in making coupon payments?

 

I'm not predicting whether they will file or not file in July or any other time, but I would say the coupon payment they just made is tiny and is probably literally a zero-factor for Sears right now.  It is simply not a material size in comparison to company's revenues/liabilities/assets.

[gurpaul88]

Sears calls ftw.

[BTShine]

Is the narrative on malls changing? 

 

http://www.cnbc.com/2017/04/20/some-mall-operators-are-turning-store-closures-into-higher-rents.html

 

https://www.wsj.com/articles/the-internet-isnt-killing-shopping-mallsother-malls-are-1492513200

 

http://www.cnbc.com/2017/04/19/vacant-department-stores-make-way-for-beer-houses-sushi-joints.html

[dyow]

I read this whole thread. I was looking at dates of posts and the stock price at that time.

 

When the stock was going up, bulls were posting "bullish" posts, that had much to do with nothing.  And the bears were nowhere to be found.

 

When the stock was going down, bears were posting bearish points.  And the bulls were nowhere to be found.

 

^ This is the opposite of what value investing should look like.

 

"The intelligent investor should buy a stock at the market price after it goes higher. and sell after it goes lower"

 

Benjamin Graham

 

[BTShine]

DYOW,

 

I fully agree with your thoughts.

 

Welcome to human psychology. 

 

 

[Spekulatius]

http://searsholdings.com/press-releases/pr/2037

 

More of the same.  The CFO is out.  That said i am still bullish based on the stock price, not the business, but we will see in a year.

 

 

 

Someone in this thread said it better than I could - SHLD is just like a bundle of money that is on fire. What matters is no how large the bundle of money is, but if the fire can be put out. If you own SHLD, you are betting that the fire can be put out, before all is gone, despite no evidence during the last 10 years that it can be done.

 

Another rule I live by: Beware the CFO leaving, it is worse than the CEO leaving, often far worse. CFO know the numbers or issues, better than anybody else, and they don't like leading a company in a bankruptcy in their resume generally.

[TwoCitiesCapital]

 

;D ;D ;D

 

I'm still selling puts, but we're in that weird period where bulls/bears can't really say anything. We're significantly off the highs, but still massively off the lows so both sides can make an argument based solely on time of initial observation. Not really a productive conversation if that's what you're arguing though.

[beaufort]

I recall Alice Schroeder talking about a company that always reported at a particular time period.  Just before the financial crisis, the company changed behaviour.  Schroeder shorted the stock on a gut feeling.  Schroeder ended up being right.  Her point was that companies get into patterns of behaviour and the change in report was a giveaway.

 

I am interested in notes as well if anyone who attends is willing to share.

[dyow]

 

;D ;D ;D

 

I'm still selling puts, but we're in that weird period where bulls/bears can't really say anything. We're significantly off the highs, but still massively off the lows so both sides can make an argument based solely on time of initial observation. Not really a productive conversation if that's what you're arguing though.

 

I think the bears are firmly in control bc they control the narrative, and they have been talking plenty of smack, just check seeking beta.  The bulls have nothing until Lamjerk can prove he can stop the operating losses (or he does a straight spin or something).  Nobody cares about the net asset value here, except for us suckers who went long.....all 4 of us.

 

The tumbleweed is representative of sears longs over the years, you roll solo and every quarter almost feels like you get hit by a truck...KAPOW adj ebitda loss of $300000000000. 

 

I won't add anymore to this thread.  I notice everytime i post on cobf about a stock, it goes to shit, when i keep my mouth shut i do much better.  Time to shut my mouth.  Plus i ain't changing anyone's mind here.

 

Edit: deleting my previous "bullish" posts, still long.....they have done studies showing that when you write something out your brain reinforces what you write down without even knowing it, meaning it makes it harder to change your mind even if you get information that contradicts your initial view.  This is more so the case when you write it out in public, your brain commits to the idea, bc you don't want to look inconsistent.  So writing stuff down actually hurts your returns without you even knowing it.......Sanjeev you should close down COBF, i think it is time.

 

 

[Oreo]

Apologies, I am curious - what % of your portfolio is the potential exposure on the puts that you've sold?

[jrydaf]

Looks like it is $73.5M for just that one property.  Interestingly it is one of the REMIC properties.  Per the recent amendment to the PBGC agreement, proceeds from any REMIC sale greater than $15M must be paid directly to the pension fund.

[BargainValueHunter]

Is this just the one property? Its about $440/sqft if it is.

 

http://www.bizjournals.com/washington/news/2017/04/27/struggling-sears-sells-its-westfield-montgomery.html

That is a VERY high income area. That valuation is a major outlier.

[thinkpad]

How do you know it is a REMIC property ?

As far as I know, no list has never been published.

[jrydaf]

REMIC List:

https://www.sec.gov/Archives/edgar/data/1310067/000119312516516958/d143938dex101.htm Exhibit 7

 

And yes, that property is in a very high income area, about 3x the national median income.  The Seritage properties averaged 11.8M/Store and I do believe these were of higher quality than what's left, though there will be various outliers here and there.