US CREDIT-Sears' share repurchase plan bad for bondholders

By Karen Brettell

NEW YORK, May 30 (Reuters) - Sears Holdings Corp's (SHLD.O: Quote, Profile, Research, Stock Buzz)
focus on buying back shares even as its earnings deteriorate is
bad for bondholders, and its debt risks further weakness as the
retailer struggles to turn around its business.

Sears on Thursday approved an expansion of its share
buyback plan as it reported an unexpected first-quarter net
loss of $56 million. It said sales fell at its Kmart and Sears
stores and markdowns hurt margins. For details, see
[ID:nN29298583]

Approval by the retailer's board to repurchase up to an
additional $500 million of the its common shares brings the
company's current buyback authorization to about $643 million.

The share buyback program "should bring little comfort to
bondholders," CreditSights analysts James Goldstein and Eugene
Wang said in a report.

"The company has relied on the strength of its balance
sheet to carry it through troubled times, but with a turnaround
in sales and margins still far off the horizon, bondholders are
asked to shoulder the weight of generous shareholder rewards,"
they said.

The cost to insure Sears' legacy debt from Sears Roebuck
Acceptance Corp, which is its most actively traded credit
default swap, rose to around 400 basis points, or $400,000 per
year for five years to insure $10 million in debt, from 355
basis points before the earnings, according to broker Phoenix
Partners Group.

Sears' debt increased by $498 million in the quarter to
$3.51 billion, as a reduction in long-term debt was offset by
greater short-term borrowings. A mixture of rising debt and
falling earnings increased the company's leverage to 1.6 times,
from 1.2 times the previous quarter, CreditSights said.

Leverage is a measure of debt to earnings before interest,
taxes, depreciation and amortization.

Sears also said on Thursday that it doesn't expect any
significant near-term improvement in the retail environment,
but it expects full-year earnings before interest, taxes,
depreciation and amortization to rise from the previous year.

"With a shrinking store base and plunging sales, this could
only be accomplished through more aggressive cost-cutting,"
said Gimme Credit's Levenson. "We have our doubts."

Standard & Poor's on Friday changed its outlook on Sears to
negative, from stable, indicating that a downgrade from "BB,"
two steps below investment grade, is more likely over the next
one to two years.

S&P analyst Ana Lai said the rating agency "is concerned
about management's ability to revive sales and improve
profitability in a challenging economic and housing environment
and an intensely competitive landscape."

And as long as the company struggles to turnaround its
operations, risks remain that it may undergo a restructuring
that further harms its bond values.

"With an "underleveraged" balance sheet, the most viable
alternative to boost the stock price remains some fear of
financial engineering, which is unlikely to be beneficial to
the credit profile," Levenson said.
(Editing by Leslie Adler)