Sears Holdings Corporation (SHLD) Down on Loan Funding Source
Shares of Hoffman Estates, Illinois-based Sears Holdings Corporation (SHLD) fell on Tuesday, on a strong day overall on Wall Street. Sears stock closed down 9.40%, losing $3.15 per share, to close at $30.37 on volume of 3,654,016 shares. The company disclosed that it is borrowing $400 million from Chief Executive Edward Lampert's hedge fund, in order to provide cash for the upcoming holiday season. The market did not take the news well, and interpreted it as evidence of a lack of other options.
In a securities filing on Monday, Sears disclosed the company is borrowing $400 million from it's Chief Executive Officer, Edward Lampert's, hedge fund - ESL Investments Inc. The company needs the money as a cash infusion to help make it through the upcoming holiday season. The company's cash reserves have been largely drained through the summer months.
The loan is actually being made by entities affiliated with ESL Investments, and will be secured by 25 of the company's retail properties. The loan will mature on December 31, but it could be extended out to February 28 as long as Sears doesn't violate the terms of the loan. ESL Investments provided $200 million on Monday with the rest to be provided by the end of September.
The market is not taking this as a positive development. The move is seen as an attempt to secure financing from an inside source, and as a temporary solution to a much larger need for liquidity. Investors are concerned that the continuation of the pattern of losses in recent years wonÃ¢??t be ending any time soon. Last month the company disclosed yet another quarterly loss for the second quarter ended August 2. Investors are also concerned over the pledging of retail stores as collateral for the loan, given that the company has been desperate to sell off the company's assets.
The loan calls into question the value of Sears' stores, which it has been selling for between $20 million and $50 million each. But based on the terms of the loan, the stores are valued at only $16 million apiece.
Fitch Ratings recently cut its credit rating due to Sears' cash situation. Meanwhile, S&P Capital IQ's Efraim Levy has reiterated his Strong Sell rating on Sears, reducing their 12 month target price on the stock by $5, down to $28. Said Levy, "We widen our FY 15 (Jan.) loss per share estimate $1.45 to $8.97, as we cut our revenue forecast 4.4%. Additionally, while Sear's obtained $400 million in liquidity via a loan from CEO Lampert affiliated sources that should provide the funds needed to purchase inventory for the holiday selling season, we think it puts at risk, via liens, Sears real estate at discounted valuations."
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