Sears Holdings Corp. (NASDAQ: SHLD), owner of the Kmart and Sears retail chains, is already badly damaged by poor financial results, a weak balance sheet, lack of foot traffic and store closings. It took another blow as S&P and Moody’s downgraded its debt, sending shares lower.

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S&P’s note, issued on January 24, read:

S&P Global Ratings today lowered its corporate credit rating on Sears Holdings Corp. to ‘CC’ from ‘CCC-‘. The outlook is negative.

At the same time, we lowered the issue-level ratings on the 6.625% senior secured second lien notes due Oct. 15, 2018 to ‘CC’ from ‘CCC’, and the senior
unsecured notes (maturing between 2027 and 2043 bearing interest between 6.50% and 7.50%) to ‘CC’ from ‘CCC-‘.

We affirmed the ‘C’ issue-level rating on the 8% senior unsecured notes due Dec. 15, 2019. All recovery ratings on these notes are unchanged.

The downgrade follows Sears’ announced offer to exchange some of its notes (8% senior unsecured notes due 2019 and the 6.625% senior secured notes due 2018) and amend the terms of its credit agreement for its second-lien term loan. We would treat the proposed transactions, if completed, as tantamount to a default. We base this on our view that the PIK option and maturity extension differs from the original promise on the debt issues and represents a distressed exchange under our criteria.

The negative outlook reflects our expectation that, if the proposed transactions are completed, we will lower the corporate credit rating to ‘SD’ (selective default) and the issue-level ratings on the affected debt facilities to ‘D’.

Moody’s posted a major downgrade on Friday as well:

 Moody’s Investors Service, (“Moody’s”) downgraded Sears Holdings Corp.’s (“Sears”) Corporate Family Rating to Ca from Caa3. Actions on other rated debt instruments are detailed below. The rating outlook remains negative. The downgrade reflects the company’s announcement of its pursuit of debt exchanges which would reduce cash interest and extend the maturity of its second lien notes due in October 2018. Approximately $1.3 billion of $4.2 billion of debt is being affected by the exchanges. “Sears’ proposed debt exchanges are a necessary step given its upcoming maturities as its unencumbered asset base continues to decline and its business turnaround remains elusive”, said Vice President, Christina Boni. “Debt maturities in the upcoming year amount to over $1.2 billion as cash used in operations is expected to approach $1.8 billion this year.”

A default could trigger a Chapter 11 filing, which in turn could be the end of Sears Holdings as a viable company. That opens the door to whether the Sears and Kmart chains would survive or be broken up and sold off in pieces. This has been mentioned often in the past as a likely event.

Sears shares fell 29% to $2.54 last week.

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