At the rate it's going, Sears Holdings Corp. (SHLD) won't have anything left to sell to keep the lights on.
On Friday, ratings agency Moody's downgraded its credit rating on Sears to Caa2 from Caa1. The downgrade reflects 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 Vice President, Christina Boni. "We expect operating cash flow to approach a disappointing loss of $1.5 billion for fiscal 2016."
On the positive side, Moody's did upgrade its rating outlook to stable from negative.
But, Sears CEO and major shareholder Eddie Lampert should take scant comfort in Moody's tossing the company that bone given some eye-opening data the agency included in its note.
Sears currently only has 211 unencumbered properties (meaning 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.
First, the remaining stores are arguably some of Sears' worst seeing as they haven't been pledged to raise cash in recent years. Secondarily, Sears put Kenmore and Diehard up for sale last May, and there has been no indication that prospective buyers have been ringing Lampert's phone off the hook to secure a deal.
To be sure, 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 Boni. And to insult to injury, Boni reiterated her concern over the viability of discounter Kmart due to "meaningful market share erosion."
For Sears, the Moody's comments are a harsh reminder that recent cash raising efforts this month are probably nothing more than short-term fixes and that death still looms large.
Earlier this month, Sears inked a deal with Stanley Black & Decker(SWK) - Get 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.
Meanwhile, the company is currently in the process of closing 150 under-performing Sears and Kmart stores to preserve cash. Below are some photos from various closings across the country.