Prospects that Sears Holdings (SHLD) could be bankrupt within two years soon could send investors in real estate investment trust (REIT) Seritage Growth Properties (SRG) running for the exit.

Shares in Seritage are up about 28% this year even amid signs that the REIT, spun off from Sears last year to raise about $2.7 billion in cash, could face serious cash-flow problems if Sears goes under.

The latest questions about Sears' viability arrived on Wednesday, when Fitch Ratings said the company posed "significant default risk" within the next 12 to 24 months due to years of weak store traffic and high levels of debt.

"Default risk means most likely a bankruptcy, or a Chapter 11 filing," said one of the report's authors, Sharon Bonelli, in a phone interview, meaning that the company will either have to liquidate to pay back its creditors, or reorganize in bankruptcy court and hope to stay alive by emerging as a smaller entity.

At issue for Sears, which is battling declining cash flow amid a prolonged stretch of losses, is repaying some $2.8 billion in high yield bonds and institutional term loans coming due in the next few years.

Sears' "restructuring risk is high over the next twelve months, as our 'CC' rating would suggest," said Monica Aggarwal, managing director of Fitch's retail team.

If Sears is forced to reorganize or liquidate, that could also spell doom for Seritage, whose portfolio of 266 retail properties includes 170 leased to Sears and another 82 leased to Kmart, the company's discount unit. About 79 percent of Seritage's rental income this year comes from Sears.

It adds up to a reality check for Seritage CEO Benjamin Schall, a former Vornado executive, as well as Sears CEO Edward Lambert, who is also chairman at Seritage, of which he owns about 4 percent. Neither Schall, nor Sears spokesman Howard Riefs, returned calls seeking comment.

A bankruptcy would likely severely diminish the rental revenue that Seritage generates from Sears. Seritage could be forced to take back a number of properties as a result of a default or a rejection of leases by Sears in a bankruptcy proceeding. And claims for unpaid rent would be subject to statutory limitations that could lead to Seritage receiving substantially less rent than it is owed, or no rent at all.

Making matters worse for Seritage, it wouldn't be able to re-lease the space quickly given what promises to be a prolonged trip through the bankruptcy court for a legacy retailer like Sears. Meanwhile, Seritage could get low-ball offers for properties as other businesses look to take advantage of its tough spot.

Seritage holds more than $1.1 billion in mortgages that helped rack up $31.3 million in interest expenses this year. With a net loss for the first half of the year six months standing at $27.3 million, it's imperative that every property is generating income.

Signs of stress for Seritage may already be taking shape.

Seritage disclosed this month that Sears exercised its right under its master lease arrangement with Seritage to exit 17 unprofitable stores -- mostly Kmart -- totaling 1.7 million in square feet. Sears will continue to pay Seritage rent until it vacates the stores by January next year. As a result of Sears' decision, it must pay Seritage about $5.8 million, or the equivalent of one year of rent for the 17 properties, as well as an undisclosed amount of estimated operating expenses.

Sears apparently couldn't wait to dump the stores onto Seritage; under its agreement detailed in Seritage's annual report, it couldn't execute such termination rights for any stores prior to Aug. 1, 2016.

Fitch joined Moody's Investors Service in sounding the alarm bell on Sears. Moody's this month slashed its speculative-grade liquidity rating on Sears one notch to SGL-3 from SGL-2. The new rating reflects the likelihood that Sears will continue to need outside financing to stay in business, and that it may require covenant relief to maintain orderly access to funding lines.

Sears was forced to accept $300 million in financing from CEO Edward Lampert's investment vehicle ESL Investments in August.

"We recognize the risks associated with relying on these sources and continued shareholder support to finance its negative operating cash flow which is estimated by Moody's to be approximately $1.5 billion this year," said Christina Boni, a Moody's vice president.

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