Fitch sees a growing risk of Sears restructuring

By Phil Wahba
January 26, 2017

Sears Holdings’s shld cash problems are only getting worse, raising the odds the troubled retailer may have to restructure, credit agency Fitch Ratings said in a research note this week, implying the possibility of a bankruptcy filing.

The company, which also operates the discount Kmart chain, is likely to burn through $1.8 billion in the fiscal year starting next week, an even bigger cash drain than 2016, Fitch estimates. And to keep up, Sears will have to raise some $2 billion to get through the latest cash squeeze.

The company has been selling off assets for years such as its tools brand Craftsman, the Lands’ End apparel brand, some of its best stores, and its stake in Sears Canada, as a long promised turnaround has failed to materialize. The company has lost more than $10 billion since as sales have cratered. During the holiday season, comparable sales at Sears and Kmart fell 12 to 13%, a sharper drop than earlier periods in the years, and Sears Holdings said this month it would close 150 stores.

And Fitch warned investors that the company is running out of ways to raise money.

“Fitch believes restructuring risk for Sears remains high over the next 12 to 24 months given the significant cash burn and reduced sources of liquidity,” the agency said in a note on Thursday. Restructuring doesn’t necessarily mean a bankruptcy protection filing, but very often does.

Sears shares fell 9% to $8, an all-time low since Sears and Kmart were merged into one company in 2005 by hedge fund manager and current Sears CEO Eddie Lampert.

“We believe that we have sufficient resources to support our operations and meet all of our financial obligations,” a company spokesman told Fortune by email.

Last week, another credit ratings agency, Moody’s, downgraded its rating on Sears to Caa2 from Caa1, saying “a meaningful business turnaround in fiscal 2017 is critical.”

To meet the urgent need to replenish its quickly emptying coffers, so far this year Sears has signed a deal with Stanley Black & Decker to sell Craftsman for about $900 million, though analysts had said last year the brand could be worth at least double that. And the retailer has also entered a $500 million secured loan facility with Lampert’s hedge fund ESL Investments, just the latest such move. All told, Sears Holdings has lined up the $2 billion or so it needs to get through the year.

 

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