UPDATED — Sears Holding Corp.’s (Nasdaq: SHLD) will pay down its existing debt with a new $750 million term loan, the financially troubled retailer says. There are varying opinions on how the five-year loan will affect Sears’ liquidity situation, however.
Sears, headquartered in Hoffman Estates, Illinois, will use the proceeds from the proposed loan, due 2020, to reduce borrowings under its $3.275 billion asset-based revolving credit facility. The company says $1.304 billion of the revolver is scheduled to mature in April; the roughly $2 billion will mature in July 2020. The retailer’s debt load also includes an existing $980 million senior term loan, due to mature in 2018.
"This transaction will improve our liquidity by freeing up more of our revolver capacity during periods when our inventory levels and liquidity needs are highest," Howard Riefs, a representative for Sears, tells Mergers & Acquisitions.
Taking on new debt with the proposed term loan may aid the retailer only in the near term. “Sears' intention to obtain a new senior first-lien secured term loan facility of up to $750 million, due 2020, does not improve the company's liquidity position versus 2015, or change its credit story, Fitch Ratings says in a March 4 report. "However, the $750 million new term loan will help to offset the April 2016 reduction of the credit facility during the third quarter peak borrowing season.”
Fitch argues that Sears might have better luck enhancing its liquidity position by placing the 268 Kmart discount stores up for grabs, which it acquired in 2004 for $11 billion in cash and equity, and by selling other assets. This move could generate an additional $2.6 billion in proceeds, Fitch says.
But Sears counters, "We believe that we have sufficient financial resources and liquid assets to fund our transformation and meet all of our financial obligations," according to Riefs. The term loan, which has a borrowing base that grows seasonally, "provides true, incremental liquidity."
Moody’s Investors Services has a differing view than Fitch on Sears’ liquidity as a result of the new term loan, but maintains its negative outlook for the company.
“We view this transaction as a credit positive for Sears, as it lengthens company's debt maturity profile and improves liquidity as the company will now have greater access to the revolving portion of the ABL revolver.” Moody’s says in a March 4 report. “The negative rating outlook reflects Moody's expectations the company will face challenges in mitigating operating losses and reducing its high cash burn, despite its ability to monetize additional real estate as needed to maintain liquidity.”
Standard & Poor’s also weighed in on the company’s loan plans, saying it expects a “very high (90 percent to 100 percent) recovery in the event of default.”
Meanwhile, Sears has already revealed plans to tap into its lines of credit and will pursue real estate-based financings to secure these borrowings. Slated for the first half of 2016 are store closures—a tactic used by many of its struggling retailer peers—an additional $300 million of asset sales and the potential unloading of its Sears Auto Center business.
Previously, the retailer rid itself of $1 billion in net debt with the sale of 266 properties to Seritage Growth Properties, a real estate investment trust (REIT) formed by Sears in April. The proceeds from the sale were used to absorb operation losses and fund the company’s pension plan.
Retailers face a slew of challenges, including striving to balance the needs of e-commerce while still maintaining brick-and-mortar stores. Sports Authority Inc. filed for bankruptcy protection in early March, following the 2015 filing of American Apparel Inc. (NYSE: APP). Other retailers are taking steps to avoid bankruptcy and/or to protect themselves in the event of bankruptcy. Men’s Wearhouse recently created holding company Tailored Brands (NYSE: TLRD).
For the previous edition of Turnaround Talk, see, "Turnaround Talk: Newspaper Publisher The McClatchy Company Commits to Reducing Debt". For more struggling companies, check out Mergers & Acquisitions' Distressed Company Watch List.