Another One Bites The Dust

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I was about 5 months too early, but I still called it.

Sears Holdings Corp is planning to close up to 150 of its department and discount stores and keep at least another 300 open as part of a plan to restructure under U.S. bankruptcy protection, people familiar with the matter said Friday.

The plans, which remained in flux on Friday afternoon, would leave the fate of Sears’ remaining roughly 250 stores uncertain, the sources said. The future of the stores could hinge on Sears’ negotiations with landlords over their leases.

In total, Sears has about 700 stores and roughly 90,000 employees.

The beleaguered 125-year-old retailer, once the largest in the United States, hopes to sell stores and other assets, including its Kenmore appliances brand and home services business, in court-supervised auctions while under bankruptcy protection, the sources said.

To be honest, I don’t remember the last time I’ve ever shopped at a Sears location, so I feel a little bad for contributing to its downfall. Sears is expected to file for bankruptcy by the weekend; Monday the latest.

Why Monday? Because that’s when the $88.4 Million out of their $1.23 Billion outstanding debt comes due. This is out of a 6.625% coupon, by the way. Sears also has a second-lien loan due the same day, which represent both the pace and nature of any recapitalization and reorganization. Liens are basically the legal right of a credit to sell the collateral property of a debtor who fails to meet its obligations of a loan agreement or contract. Property subject to a lien cannot be sold by the owner without the consent of the lien holder.

Market prices for Sears debt moved from 87 cents on the dollar to as low as 35 cents on the dollar. Prices for bonds maturing later dipped lower to 12 cents.

Behavior to date, by both the company and majority owner Edward Lampert, would point to a short-term solution via the disposition of additional assets, thereby allowing the company to make it throughout the holiday season.

However, such actions may be similar to placing a band-aid over a bullet wound. Sear’s debt problems appear to extend further than just next week.

Sears still has a $169 million convertible note that expires around the same time next year. Considering the state of the company, it’s difficult to imagine investors finding the equity more valuable than the debt. The company also has to also repay it’s lien loans worth $531 million dollars. The company also has a $271 million outstanding letter of credit that is due at the end of the year.

Overall, the company is on the hook for nearly $1.5 billion in 2019, and as you can see, the problems don’t necessarily fix themselves in 2020.

The final nail in Sears coffin is all but certain. There have been reports that the company has skipped payments to vendors. There have also been reports of the creditors pushing for the company to liquidate its assets as soon as possible.

At Wednesday’s meeting, Sears proposed a restructuring plan to shrink its store base dramatically, at which point is expected to be profitable, the person said. But the banks argued the safest way for them to recoup their money is to sell all of the remaining stores and liquidate the inventory, the person said.

Although my predictions were 5 months two earlier, it’s pretty clear that this case wasn’t a matter of if, but when.

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Andre is a senior at Pace University, studying Finance and Economics. His topics of interests include Equity Valuation, Short Ideas, Macro, Monetary Economics, ETFs, Forex and Fixed Income. His sectors of choice involve Technology, Consumer Goods, and Financials. Andre has completed a number of internships at leading investment banks domestically and abroad.