There is no other way to put it: Sears Holdings Corp. (SHLD) is in a death spiral.
The cost of insuring the dying department store's debt against default has nearly doubled over the last month, according to Bloomberg data. The credit default market is pricing in a roughly 50% chance that Sears will miss a debt payment and possibly go bankrupt by year-end.
To be sure, this shouldn't come as a shock to anyone.
Shares of Sears and Kmart crashed over 30% in January, triggered by renewed fears the end is nearing for the once storied retailer. Sears CEO Eddie Lampert, who owns about 31.2 million shares of the company according to Bloomberg data, on paper lost a cool $91 million during the month's long rout.
The stock is now hovering around an all-time low of $5.52.
For Sears, the negative news has just kept piling up this year.
Sears burned through $1.6 billion in cash last year, said Fitch Ratings recently, adding that it expects the company to burn through another $1.8 billion this year. As a result, Fitch estimates Sears will have to raise approximately $2 billion in liquidity in 2017, roughly in line with the annual average over the past five years, if it wants to keep the doors open.
Fitch believes restructuring risk for Sears remains "high" over the next 12 to 24 months given the significant cash burn and reduced sources of liquidity.
Earlier in January, Moody's downgraded its credit rating on Sears to Caa2 from Caa1. The downgrade reflected the accelerating negative sales performance of Sears' business, Moody's said.
"Although Sears has been able to fund its continued cash shortfalls through planned asset monetization, and additional financings, a meaningful business turnaround in fiscal 2017 is critical given the continued reduction of its asset base", said Moody's VP Christina Boni. "We expect operating cash flow to approach a disappointing loss of $1.5 billion for fiscal 2016."
Sears currently has just 211 unencumbered properties (properties that haven't already been pledged as collateral for debt) left across the Sears and Kmart concepts that Moody's values at $2.5 billion. It also points out Sears could still raise an undetermined amount of money from the sale of its Kenmore and Diehard brands.
But Moody's valuation of those remaining assets could be in question for two reasons.
The end may be nearing for Sears and Kmart
First, the remaining stores are arguably some of Sears' worst, seeing that they haven't been pledged to raise cash in recent years. Second, Sears put Kenmore and Diehard up for sale last May, and there has been no indication that prospective buyers have been ringing CEO Edward Lampert's phone off the hook to secure a deal.
Indeed it was quite telling as to the value -- or lack thereof -- of Diehard and Kenmore in that Craftsman was the first brand to be sold off.
"The company must improve its business performance dramatically to have a meaningful impact on its high cash burn," writes Moody's Boni. Adding insult to injury, Boni reiterated her concern over the viability of discounter Kmart due to "meaningful market share erosion."
For Sears, the comments from the ratings agencies are a harsh reminder that recent cash raising efforts this month are probably nothing more than short-term fixes and that its death still looms large.
Sears inked a deal recently with Stanley Black & Decker (SWK) - Get Stanley Black & Decker, Inc. Report to acquire Craftsman for a total consideration of $900 million. As TheStreetreported last October, Craftsman was rumored to fetch about $2 billion in a sale process that kicked off in May. Stanley Black & Decker will pay Sears $525 million in cash on an undisclosed closing date, $250 million three years after the deal has closed, and annual payments on new Stanley Black & Decker Craftsman sales through year 15.
Sears also entered into a $500 million secured loan facility with Lampert's hedge fund ESL Investments. Of the total, $321 million was funded under the loan facility, with the remaining $179 million available for withdrawal in the future. In a sign of Sears' beleaguered financial state, the loan bears an interest rate of 8%.
Securing the loan facility are the mortgages of 46 Sears properties. If Sears draws from the remaining $179 million, it will add additional properties as security.
The company also scored a standby letter of credit facility from affiliates of ESL Investments, allowing it to draw an initial amount of up to $200 million. The hedge fund provided $300 million of debt financing last August after funding $125 million of a $500 million loan in April.
The cash raising is necessary for Sears not only to stay in business, but to also try and prepare for looming debt repayments.
At issue for Sears is how it will repay some $2.8 billion in high yield bonds and institutional term loans coming due in the next few years. In July 2017, or about eight months from now, Sears will have a $500 million term loan secured by 21 properties come due. It's already borrowed all but $11 million of that sum.
Sears spokesman Howard Riefs didn't return a request for comment.
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