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TEXT-Fitch affirms Sears Holdings IDR at 'CCC', outlook is negative
December 5, 2012 / 3:45 PM / 5 years ago

TEXT-Fitch affirms Sears Holdings IDR at 'CCC', outlook is negative

Dec 5 - Fitch Ratings has affirmed its long-term Issuer Default Ratings
(IDR) on Sears Holdings Corporation (Holdings) and its various
subsidiary entities (collectively, Sears) at 'CCC'. The Rating Outlook is
Negative. A full ratings list is shown below.

The magnitude of Sears' decline in profitability and lack of visibility to turn
operations around remains a major concern. Fitch expects 2012 EBITDA could be in
the range of $400-$500 million mainly on significant expense reduction of $500
million as the top line is expected to decline in the 8-9% range leading to
gross profit dollar contraction. EBITDA is expected to remain under pressure and
could potentially turn negative in 2013, unless the company continues to offset
gross profit dollar declines with expense reductions. Fitch expects top line
contraction in the 8-9% range in 2013 and mid-single digit range in 2014, due to
domestic comparable store sales (comps) in the negative 3% range, store
closings, and spin-off of certain businesses. The 2012 and 2013 revenue
estimates reflect the spin-off of Sears Hometown and Outlet businesses and
certain hardware stores in October 2012. These assets represented approximately
$2.3 billion-$2.6 billion in revenue and $70 million-$80 million in EBITDA in
2011.

Fitch estimates that Sears will need to generate a minimum EBITDA of $900
million to $1 billion in 2013 and 2014 to service cash interest expense, capital
expenditures, and pension plan contributions. As a result, Sears will need to
continue funding operations with increased borrowings and/or asset sales and may
need to access external sources of financing. Liquidity remained adequate to
fund 2012 working capital needs given the availability under Sears' U.S. and
Canadian facilities, significant reduction in inventory and recent asset
sales/spin-offs. If Sears is unable to access the capital markets or find other
sources of liquidity, and EBITDA remains at the current level or lower, there is
a risk of restructuring over the next 24 months.

Domestic Sears and Kmart stores have been underperforming their retail peers on
top-line growth for many years. The combined domestic entity has lost $9
billion, or almost 20%, of its 2006 domestic revenue base through the end of
2011, leading to tremendous pressure on profitability. This reflects competitive
pressures, inconsistent merchandising execution and the lack of clarity about
its long-term retail strategy. Fitch expects both Kmart and Sears will remain
share donors. Sears' comps are expected to be in the negative 2%-3% range in
2012-2014, while Kmart's comps are expected to be in the negative 3-4% range.
Sears Canada has also been very weak over the past three years with comps in the
negative mid-to-high single digits.

As of Oct. 27, 2012, Sears had $1.5 billion of borrowings under the domestic
revolver, with $1 billion of availability under its domestic $3.275 billion
credit facility due 2016 and $433 million under its CAD$800 million credit
facility due 2015. The availability under its domestic revolver was essentially
the same as last year while the Canadian availability was almost approximately
$360 million lower (with $300 million due to reserves that could be applied by
the lenders unless the company pledges additional collateral).

The availability under the domestic revolver remained essentially flat because
Sears injected close to $2 billion in liquidity this year to fund operations
given the significant shortfall in EBITDA beginning last year. Actions taken
included: (1) peak inventory reduction of $575 million including $200 million
from store closings; (2) $500 million in expense reduction; (3) $440 million
from the sale of certain properties and (4) $450 million from the spin-off of
its Hometown and Outlet businesses.

Given the current level of EBITDA and Fitch's expectation that it could
deteriorate in 2013, Sears will need to continue to reduce inventory, cut costs
and sell assets to fund operations. Sears has the ability to issue $1.75 billion
in secured debt as permitted under its credit facility ($1 billion accordion
feature to upsize the domestic credit facility and $750 million in second lien
debt). However, it could have difficulty tapping into this debt if operating
trends continue to deteriorate, especially if credit market conditions are
adverse at that time.

Recovery Considerations for Issue-Specific Ratings:
In accordance with Fitch's Recovery Rating (RR) methodology, Fitch has assigned
RRs based on the company's 'CCC' IDR. Fitch's recovery analysis assumes a
liquidation value under a distressed scenario of approximately $6.5 billion (low
seasonal inventory) to $7.4 billion on (close to peak seasonal inventory) on
domestic inventory, receivables, and property, plant and equipment.

The $3.275 billion domestic senior secured credit facility, under which Sears
Roebuck Acceptance Corp. (SRAC) and Kmart Corporation (Corp.) are the borrowers,
is rated 'B/RR1', indicating outstanding (90%-100%) recovery prospects in a
distressed scenario. Holdings provides a downstream guarantee to both SRAC and
Kmart Corp. borrowings and there are cross-guarantees between SRAC and Kmart
Corp. The facility is also guaranteed by direct and indirect wholly-owned
domestic subsidiaries of Holdings which owns assets that collateralize the
facility.

The facility is secured primarily by domestic inventory which is expected to
range from $7 billion to $8.5 billion around peak levels in November, and
pharmacy and credit card receivables which are estimated to be $0.5 billion. The
credit facility has an accordion feature that enables the company to increase
the size of the credit facility or add a first-lien term loan tranche in an
aggregate amount of up to $1 billion and issue $750 million in second-lien debt.
The credit agreement imposes various requirements, including (but not limited
to) the following: (1) if availability under the credit facility is beneath a
certain threshold, the fixed-charge ratio as of the last day of any fiscal
quarter be not less than 1.0 times (x); (2) a cash dominion requirement if
excess availability on the revolver falls below designated levels, and (3)
limitations on its ability to make restricted payments, including dividends and
share repurchases.

The $1.25 billion second lien notes due October 2018 at Holdings are also rated
'B/RR1'. The notes have a second lien on all domestic inventory and credit card
receivables, essentially representing the same collateral package that backs the
$3.275 billion credit facility on a first-lien basis. While Fitch has not made a
distinction between the first- and second-lien notes at this point given the
significant collateral backing the notes and facility, it could do so in the
future should Sears be able to exercise the accordion feature under the credit
facility, issue additional second-lien notes or the assets serving as collateral
continue to decline materially. The notes contain provisions which require
Holdings to maintain minimum asset coverage for total secured debt (failing
which the company has to offer to buy notes sufficient to cure the deficiency at
101%). The senior unsecured notes are rated 'CCC/RR4', indicating average
recovery prospects (31% - 50%). While the credit facility and second-lien notes
are overcollateralized currently and the spill-over could provide better than
average recovery prospects for the unsecured bonds, factors considered in
assigning the recovery rates include the potential sizable claims under lease
obligations and the company's underfunded pension plan. The SRAC senior notes
are guaranteed by Sears, which agrees to maintain SRAC's fixed-charge coverage
at a minimum of 1.1x. In addition, Sears DC Corp. (SDC) benefits from an
agreement by Sears to maintain a minimum fixed-charge coverage at SDC of 1.005x.
Sears also agrees to maintain an ownership of and a positive net worth at SDC.

What Could Trigger a Rating Action
A negative rating action could result from further deterioration in credit
metrics or a significant decline in liquidity. Although Sears has the ability to
potentially add $1.75 billion in secured indebtedness under its covenants and
pull other levers to shore up liquidity, the magnitude of the decline in
profitability and the lack of visibility to turn around operations remain a
major concern.

A positive rating action could result from a sustained improvement in comps and
EBITDA to a level where the company is covering its fixed obligations. This is
not anticipated at this time.

Fitch has affirmed the ratings as follows:

Sears Holdings Corporation (Holdings)
--Long-term IDR at 'CCC';
--Secured bank facility at 'B/RR1';
--Second-lien secured notes at 'B/RR1';

Sears, Roebuck and Co. (Sears)
--Long-term IDR at 'CCC'.

Sears Roebuck Acceptance Corp. (SRAC)
--Long-term IDR at 'CCC';
--Short-term IDR at 'C';
--Commercial paper at 'C';
--Senior unsecured notes at 'CCC/RR4'.

Kmart Holding Corporation (Kmart)
--Long-term IDR at 'CCC'.

Kmart Corporation (Kmart Corp)
--Long-term IDR at 'CCC'.

Sears DC Corp. (SDC)
--Long-term IDR at 'CCC'';

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process other than through the medium of its
public disclosure. The ratings above were unsolicited and have been provided by
Fitch as a service to investors.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology'(Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Nov. 13, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

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