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Rating Action:

Moody's assigns Ba3 rating to Sears Holding's secured term loan

04 Mar 2016

New York, March 04, 2016 -- Moody's Investors Service, ("Moody's") today assigned a Ba3 rating to Sears Holdings Corp.'s ("Sears") new $750 million senior secured ABL Term Loan due 2020. All other ratings including the Caa1 Corporate Family Rating, and the negative outlook, are unchanged.

We view this transaction as a credit positive for Sears, as it lengthens company's debt maturity profile and improves liquidity as the company will how have greater access to the revolving portion of the ABL revolver. The Ba3 rating assigned to Sears Holdings' first lien term loan reflects its first priority position on the company's domestic inventory and accounts receivable as well as the structural protections provided to this loan as provided for in the asset based credit agreement. The new term loan ranks pari-passu with the existing $980 million secured term loan due 2018 (also rated Ba3). Proceeds from the new term loan are expected to be used to pay down a substantial portion of amounts drawn under the company's ABL Revolver (as of January 30, 2016 the company had approximately $797 million drawn under the ABL Revolver).

The following rating was assigned:

Sears Holdings Corp.

Senior secured ABL Term Loan due 2020 at Ba3, LGD 2

RATINGS RATIONALE

Sears' Caa1 rating reflects the company's sizable operating losses -- Domestic Adjusted EBITDA (as defined by Sears) was a loss of $836 million during fiscal 2015 and its cash burn was approximately $2.5 billion. It remains uncertain if the company's operating strategies will stem its continued losses and be sufficient for its cash burn to approach breakeven levels. While the company maintains a sizable asset base its debts are significant with approximately $3.2 billion of funded debt as well as an unfunded pension obligation of $2.1 billion. The ratings also reflect Moody's view on the uncertainty of the viability of the Kmart franchise in particular given its meaningful market share erosion. The Caa1 rating also reflects that even after recent transactions, Sears still retains ownership of around 419 properties across the Sears and Kmart banners and the $2.7 billion Seritage transaction (266 properties) demonstrates the company's ability and willingness to monetize its holdings. We also recognize the nature of the arrangements with Seritage and the joint ventures with three large mall developers provide flexibility for Sears to reduce its store footprint over time, which we think has the potential to be positive for Sears.

The negative rating outlook reflects Moody's expectations the company will face challenges in mitigating operating losses and reducing its high cash burn despite its ability to monetize additional real estate as needed to maintain liquidity. The negative outlook recognizes the company's benign debt maturity profile with no meaningful debt maturities until 2018 but recognizes the company's high cash needs including minimum pension contributions of approximately $596 million in 2016 and 2017, annual interest expense of $300 million and annual capex of $200 million.

In light of the negative outlook, an upgrade in the near-term is unlikely. However, ratings could be upgraded if the company were to make meaningful further progress improving operating results while maintaining a good liquidity profile. Quantitatively ratings could be upgraded if we expected EBITDA-Cap Ex to interest to sustainably approach 1 times while maintaining a good liquidity profile.

Ratings could be downgraded if the company's unencumbered asset base continued to erode while adjusted EBITDA losses remained significant and asset sale proceeds primarily were used to fund operating losses. Ratings could be downgraded if the company's liquidity were to become more constrained, operating losses widened beyond current levels, or if probability of default were to otherwise increase.

Headquartered in Hoffman Estates, IL, Sears Holdings Corporation ("Sears Holdings") through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation, operates 1,672 stores in US as of January 30, 2016. For the most recent LTM period, domestic revenues were $25.2 billion. 48.5% of Sears Holdings' common stock is held by entities affiliated with Sears Chairman and CEO Mr. Edward S. Lampert

The principal methodology used in this rating was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Tuhy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Hofferber, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba3 rating to Sears Holding's secured term loan
No Related Data.
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