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Rating Action:

Moody's revises Sears Holdings outlook to stable from negative, Caa1 Corporate Family Rating affirmed.

05 Aug 2015

New York, August 05, 2015 -- Moody's Investors Service today revised Sears Holdings Corp.'s rating outlook to stable from negative. Moody's also upgraded the company's first lien ABL term loan due 2018 to Ba3 from B1. All other ratings including the Caa1 Corporate Family Rating were affirmed.

The revision in the rating outlook reflects the meaningful improvement in Sears liquidity profile following the closing of various real estate transactions with Seritage Growth Properties and joint ventures with three large mall owners and operators which generated approximately $3 billion in cash. Sears liquidity profile also benefitted from the extension of $1.971 billion of its current $3.275 billion asset-based revolving credit facility to July 20, 2020 (the unextended balance of approximately $1.3 billion remains in place, but will expire in April 2016). After these recent transactions involving 266 properties, Sears still retains ownership of over 415 properties which remain a future source of potential liquidity. At the same time while Sears' operating losses remain sizable, the company has seen year-over-year improvement in each of the past four quarters as the company is focused on its more profitable segments and reducing duplicative marketing costs.

The upgrade in the rating of the first lien ABL term loan reflects the expected reduction in the revolving credit component of the asset-based revolver in 2016. As a result of the lower longer term revolving commitment, recovery expectations for the ABL term lenders have increased.

We note Sears has announced it is tendering for up to $1 billion of its senior secured second-lien notes due 2018. We would not anticipate any rating changes in any of Sears debt instruments if this tender is successful.

The following ratings were upgraded:

Sears Holdings Corp.

..Senior Secured Bank Term Loan due 2018 to Ba3, LGD2 from B1, LGD2

Outlook Change:

Sears Holdings Corp:

.. Outlook, Changed to Stable from Negative

Sears Roebuck Acceptance Corp.

..Outlook, Changed to Stable from Negative

The following ratings were affirmed:

Sears Holdings Corp.

..Corporate Family Rating, Affirmed Caa1

..Probability of Default Rating, Affirmed Caa1-PD

..Speculative Grade Liquidity Rating, Affirmed SGL-2

..Senior Secured Regular Bond/Debenture due 2018, Affirmed Caa1, LGD assessment revised to LGD3 from LGD4

..8% Senior Unsecured Notes due 2019, Affirmed Caa3, LGD6

.. Shelf, Affirmed (P)Caa3

Sears Roebuck Acceptance Corp.

.. Senior Unsecured Regular Bond/Debenture, Affirmed Caa2, LGD5

.. Commercial Paper, Affirmed NP

RATINGS RATIONALE

Sears' Caa1 rating reflects the company's sizable operating losses -- Domestic Adjusted EBITDA (as defined by Sears) was a loss of $531 million in the latest 12 month period (at the mid point of the company's guidance for Q2 2015). At this level of performance cash burn -- after capital expenditures ($230 million), cash interest (around $280 million pro-forma for the issuance of its October 2019 notes, but with no benefit to any cost savings from possible debt repayment) and pro-forma for incremental rent associated with its recent sale/leaseback transactions (initially $182 million, which could reduce if Sears exits stores or the REIT recaptures space) is near $1.2 billion per annum. While the company's liquidity profile has improved it remains uncertain if the company's operating strategies will be sufficient for its cash burn to approach breakeven levels. While the company maintains a sizable asset base its debts are significant with approximately $2.5 billion of funded debt (assuming repayment of $1.0 billion of its second-lien notes due 2018) as well as an unfunded pension obligation of $2.3 billion. The ratings also reflect our view on the uncertainty of the viability of the Kmart franchise in particular given its meaningful market share erosion.

The Caa1 ratings also reflects that even after recent transactions, Sears still retains ownership of around 415 properties across the Sears and Kmart banners and the Seritage transaction demonstrates the company's ability and willingness to monetize its real estate and the value in these 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 a positive for Sears. That said the company is seeing persistent declines in market share, and it is not clear that these actions will be sufficient to offset other headwinds for the company and to have a meaningful impact on its high cash burn.

The stable rating outlook reflects that the company's liquidity is expected to remain good as the recent transactions and the ability to monetize additional real estate as need to maintain liquidity. The stable outlook also considers the company's benign debt maturity profile with no meaningful debt maturities until 2018 though it does have to make minimum pension contributions of approximately $595 million in 2015 and 2016. Should the company's tender for up to $1.0 billion of its second-lien notes due 2018 be successful, its refinancing needs in 2018 as well would moderate materially.

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 lowered if the company's unencumbered asset base continued to erode while adjusted EBITDA losses remained significant and asset sale proceeds primarily 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 1,716 stores in US as of May 2, 2015. For the most recent LTM period, domestic revenues were $27.8 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 these ratings was Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 revises Sears Holdings outlook to stable from negative, Caa1 Corporate Family Rating affirmed.
No Related Data.
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