Waiting in Lampert's Orchard

Sears spokesman Chris Brathwaite declined to comment on the deal beyond the details included in the press release, except to say that this possibility "had been anticipated or contemplated when the deal was announced."

After the deal closed, Moody's Investors Service gave Orchard Supply a B1 credit rating, a deeply speculative grade. Moody's rating "considers the leveraged nature of Orchard's expected balance sheet," along with competitive threats posed by Lowe's (LOW Quote) and Home Depot (HD Quote), the ratings outfit said in a press release.

Orchard Supply currently operates 84 hardware stores in California, and its financials are not available to the public. Sears, which has a speculative-grade debt rating by all the major ratings agencies, reported more than $4 billion in debt outstanding at the end of its second quarter.

Marty Fridson, the publisher of Leverage World, said it looks like the deal became partly "seller financing," which leaves Sears on the hook should the junk bond market further deteriorate or if something went wrong with Orchard Supply Hardware.

"That certainly wouldn't be their first choice," Fridson said. "I'm sure they would have rather had the cash and moved on, rather than having the potential of being dragged back into it in the event of a failure down the road."

In its release, Sears said the use of a note for part of the dividend was always on the table "to ensure that Orchard Supply Hardware would not be dependent on conditions in the high-yield debt market." Orchard Supply expects to refinance the note when "market conditions improve and provide it with an appropriate financing rate."

Will that happen? It might or might not.

"There have been big capital outflows from the high-yield debt sector with the flattening of the yield curve, and it hasn't been the best time for raising money there lately," Fridson said. "A number of deals have been postponed or canceled. That doesn't mean this is an exceptionally poor deal among others that have been out there, but it's just been a tougher environment lately."