Sears Holdings Responds to Fitch Action

Let’s just call this what it is, the rating agencies, tired of looking like duplicitous dopes in the current credit environment, are going to cut a swath through businesses downgrading or putting them on “watch” in a classic “CYA” move.

Sears Holdings (SHLD) Responds:

Today Fitch Ratings (“Fitch”) issued a press release in which it downgraded the ratings associated with certain of Sears Holdings Corporation’s (“SHC”) outstanding debt obligations. SHC does not agree with Fitch’s action given our current liquidity position, reduced debt levels, demonstrated history of cash flow generation and available assets. We believe that we are being unfairly treated, as many of our biggest competitors have dramatically increased debt levels over the past several years with little or no consequence to their ratings.

SHC has consistently maintained a strong capital structure and generated significant cash flow from operations. In fact, SHC has generated $5.2 billion of operating cash since the merger and $1.5 billion last year. The $4 billion credit facility entered into at the time of the Sears/Kmart merger was structured to provide significantly more liquidity than Sears Holdings anticipated requiring in order to provide flexibility to fund our working capital needs and to pursue a variety of value creating strategies. Since the merger in March 2005, the largest amount outstanding under the facility at any time to date has been $1.8 billion, of which $1 billon represented standby letters of credit issued primarily to support our insurance programs. Over this same period, SHC has paid down approximately $2 billion of the outstanding debt assumed from Sears at the time of the merger. SHC has also made contributions of approximately $1 billion to fund the frozen pension plans of its predecessor companies. This credit facility, by its terms, continues through March 2010 and carries no financial ratio covenants that are applicable (the financial ratio covenants contained in the agreement are only applicable at SHC’s election).
SHC has significant assets, including cash of $1.5 billion, owned and attractive long-term leased real estate, a stable of nationally recognized proprietary brands (Kenmore, Craftsman, Lands’ End and DieHard) and a 70% equity interest in Sears Canada. In addition, SHC has $9 billion of inventory that currently secures the $4 billion credit facility.

We wish to thank Fitch for retracting the incorrect statement that appeared in its Retail Register Report published on September 17, 2008 in which reference was made to concerns stemming from the elimination of the Bank of America cash-backed letter of credit facility. As noted in the correction issued today by Fitch, that facility did not provide incremental liquidity over and above the existing $4 billion credit facility. The Bank of America facility was designed as a less expensive means for Sears Holdings to issue letters of credit at a time when we had several billions of dollars of excess cash with which to collateralize the facility. With lower cash levels, the facility no longer made economic or operational sense and was significantly reduced, with a small amount retained to continue certain outstanding international letters of credit. Bank of America continues to hold one of the largest commitments in our existing $4 billion credit agreement.

Given that Fitch’s rating change utilizes mid-year debt levels and credit metrics, we have requested that Fitch monitor our credit rating for upgrade as soon as the calculations on which their decision is based no longer govern. At a time when many companies are suffering from excessive leverage undertaken over the past several years, Sears Holdings is well positioned from decisions we made to reduce our leverage since the merger and to allow for the inevitable cycles that tend to occur in the retail business.

Now, Sears has a balance sheet second only to Target (TGT) and WalMart (WMT) in retail. That being said, I think either a slew of retail credit downgrade are coming OR and this is the most likely one, the rating agencies are just running around trying to figure out what went wrong.

As they run around, they are cutting everything in sight. This, the irony here is that they are cutting rating, just as we have clarity (some at least) and things looks like they may finally stabilize.

This will be yet another case of them cutting too late, then finally taking action just when things get better..

Disclosure (“none” means no position):Long SHLD, WMT, none.
Visit the ValuePlays Bookstore for Great Investing Books