Rating Agency Says Sears Is in Default on Some Debt

Standard & Poor’s believes Sears Holdings Corp. (NASDAQ: SHLD) is in default on some of its debt. It is another blow to the owner of Sears and Kmart. Several analysts have predicted the retailer eventually will file for Chapter 11.

S&P researchers wrote:

S&P Global Ratings today lowered its corporate credit rating on Sears Holdings Corp. (SHLD) to ‘SD’ from ‘CC’.

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At the same time, we lowered the issue level ratings on the debt issues that were the subject of the completed exchange offer to ‘D’.

Other issue-level ratings remain unchanged.

The downgrade follows the close of SHLD’s previously announced debt exchange transactions:

8% senior unsecured notes due 2019 exchanged for senior unsecured convertible pay-in-kind (PIK) toggle notes due 2019;

6 5/8% senior secured notes due 2018 exchanged for new senior secured convertible PIK toggle notes due 2019;

SRAC’s $100 million of senior unsecured notes due between 2027 and 2043 (interest between 6.50% and 7.50%) exchanged for new unsecured notes maturing in March 2028 (cash interest 7.00% or PIK interest at 12.00%). The SRAC Exchange Notes are guaranteed by the same subsidiaries  of SHLD which guarantee the new senior secured notes.

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S&P’s definition of this rating level:

An obligor rated ‘SD’ (selective default) or ‘D’ is in default on one or more of its financial obligations including rated and unrated obligations but excluding hybrid instruments classified as regulatory capital or in nonpayment according to terms. An obligor is considered in default unless S&P Global Ratings believes that such payments will be made within five business days of the due date in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days

Sears shares have dropped 84% over the past year to $2.30, while the S&P 500 is higher by 54% for the same period. Sears revenue was $40.0 billion in 2013 but dropped to $22.1 billion last year. Sears has sold some divisions over that period. Sears lost $1.4 billion in 2014 and $2.2 billion last year, based on net income. The company has lost money every year since 2012.

Sears same-store sales have been slaughtered recently as shoppers have moved online or started to shop and brick-and-mortar rivals. Almost no one believes that customers will return to its aging stores.

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