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Rating Action:

Moody's revises Sears Holdings rating outlook to negative, affirms Caa1 CFR and SGL-2 liquidity rating, and assigns Caa3 rating to new notes

11 Nov 2014

New York, November 11, 2014 -- Moody's Investors Service today revised the rating outlook on Sears Holdings Corporation ("Sears") to negative from stable. Moody's also assigned a Caa3 (LGD 6) rating Sears Holdings Corporation's 8% Senior Unsecured Notes due 2019. The company's Caa1 Corporate Family Rating and SGL -- 2 rating -- indicating good liquidity over the next 12 months - were affirmed.

The revision in the rating outlook to negative reflects Sears still significant operating losses. The mid-point of Sears updated guidance for its third fiscal quarter domestic Adjusted EBITDA (as defined by Sears) will be around negative $776 million for the first three quarters of fiscal 2014 compared to negative $398 million in the year prior period. We estimate Sears cash burn will be near $1.4 billion in the current year (after taking into consideration cash interest costs -- estimated at around $275 million, pro-forma for the 2019 note offering and domestic capital expenditures estimated around $275 million). The rating outlook revision also reflects we expect earnings to remain substantially unchanged over the next fiscal year as we do not see catalysts to enable the company to meaningfully improve operating performance. The rating outlook revision also reflects while the possible sale leaseback of 200-300 stores will provide liquidity, it does not solve Sears operating challenges.

The affirmation of the company's Caa1 Corporate Family Rating reflects our views that the company will continue to maintain good liquidity over the next year, which would be bolstered by successful issuance of its proposed 2019 senior unsecured notes pursuant to the rights offering the company is currently undertaken, and if concluded, proceeds from a sale/leaseback transaction. The affirmation also reflects the company's lack of near dated maturities outside its asset-based revolver until 2018 and the lack of any meaningful catalyst for a default to take place. The company still maintains a sizable asset base though it has reduced over the course of fiscal 2014 through the spin-off of Lands' End, the monetization of a substantial portion of its stake in Sears Canada and would moderate further if the company proceeds with a sale leaseback transaction.

The Caa3 rating assigned to the Senior Unsecured Notes due 2019 reflects that they are an obligation of Sears Holdings Corporation, with no guarantees from any of Sears Holdings' subsidiaries. As such the notes are structurally subordinated to a meaningful amount of secured debt in the company's capital structure as well as all obligations of its subsidiary companies. The Senior Unsecured Notes due 2019 will be distributed pursuant to a rights offering currently being offered to all holders of Sears' Common Stock. Sears Holdings is distributing Rights to all holders of its common stock. Each Right will provide a shareholder with the right, but not the obligation, to purchase a Unit, consisting of (a) the 8% Senior Unsecured note due 2019 and (b) Warrants to purchase additional common stock of Sears Holdings. Shareholders will have until November 18, 2014 to exercise their rights. Assuming all shareholders subscribe to the Units, the total amount of Senior Unsecured 2019 notes issued would be $625 million. Entities affiliated with Sears' CEO and Chairman Mr. Edward S. Lampert, who own approximately 48.5% of Sears' common stock, have advised Sears they intend to exercise their rights in full.

The following ratings were affirmed:

Sears Holdings Corp.

Probability of Default Rating, Affirmed Caa1-PD

Speculative Grade Liquidity Rating, Affirmed SGL-2

Corporate Family Rating, Affirmed Caa1

Senior Secured Bank Credit Facility due Jun 30, 2018, Affirmed B1(LGD2)

Senior Secured Regular Bond/Debenture due Oct 15, 2018, Affirmed Caa1(LGD4)

Sears Roebuck Acceptance Corp.

Senior Unsecured Regular Bond/Debenture, Affirmed Caa2(LGD5)

Outlook Actions:

Sears Holdings Corp.

Outlook, Changed To Negative From Stable

Sears Roebuck Acceptance Corp.

Outlook, Changed To Negative From Stable

The following ratings were assigned:

Sears Holdings Corporation

8% Senior Unsecured Notes due 2019 at Caa3 (LGD 6)

RATINGS RATIONALE

Sears' Caa1 Corporate Family Rating reflects the company's sizable operating losses which have increased over the course of 2014 and the lack of visibility on near term catalysts which will reduce these sizable losses materially. We expect Sears will have a cash burn -- after capital expenditures and interest expenses -- to be near $1.4 billion in the current fiscal year. The rating also considers our view that the viability of Kmart (which represented around 41% of domestic sales in its latest fiscal year), is uncertain given its continued challenges as evidenced by its meaningful operating losses and market share erosion. The Caa1 rating considers the company's proven ability to generate cash from its sizable asset base, which currently includes its unencumbered real estate and its ownership of well known consumer brands such as Kenmore, Craftsman and DieHard.

The negative rating outlook reflects our expectations that the company's unencumbered asset base will continue to erode as Sears considers actions such as the disclosed possible sale and leaseback transaction. This erosion in the company's unencumbered asset base is occurring while the company is still incurring sizable adjusted EBITDA losses which will need additional funding. Negative rating pressure would build if the company's asset base were to continue to erode while operating losses remain sizable.

Ratings could be downgraded if the company's liquidity were to become more constrained, operating losses widened beyond current levels, or if the company's unencumbered asset base were to erode, or the probability of default were to otherwise increase.

Ratings could be upgraded if the company demonstrated stabilization of sales and improved operating margins, evidencing successful results of its efforts to transform its business. Ratings could be upgraded if cash flows approaches break-even levels and interest coverage (EBITDA-Cap Ex to Interest) approaches 1 times, while maintaining a good overall liquidity position. The rating outlook could be stabilized If the company were able to maintain a good overall liquidity profile and a meaningful asset base while its cash burn made substantial progress toward break-even levels.

Headquartered in Hoffman Estates, IL, Sears Holdings Corporation through its subsidiaries, including Sears, Roebuck and Co. and Kmart Corporation, with more than 1800 full-line and specialty retail stores across the United States and Canada. LTM domestic revenues exceed $31 billion. 48.5% of Sears Holdings common shares are 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.

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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.

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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 Ann Hofferber
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 rating outlook to negative, affirms Caa1 CFR and SGL-2 liquidity rating, and assigns Caa3 rating to new notes
No Related Data.
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