NEW YORK – Sears Holdings will pay double the interest cost on a new $1 billion loan as it seeks to bolster liquidity at a time when it's forecast to run out of cash in as soon as six months.
The unprofitable retailer controlled by Edward Lampert is obtaining the term loan at an interest rate of 5.5 percent, which will reduce borrowings under a $3.3 billion credit line that pays as much 2.5 percentage points more than benchmarks, according to data compiled by Bloomberg.
At its current burn rate, the Hoffman Estates, Ill.-based company will exhaust its cash by April.
Sears, whose revenue has declined 19 percent since its merger with Kmart Holding Corp. in 2005, has failed to stem five consecutive quarterly losses with the introduction of new initiatives such as a loyalty program that offers members discounts.
The company is raising debt as it faces rising fixed costs and is giving itself more freedom to tap into its revolving line of credit.
"That's a little bit of a red flag that the cash flow is going to be a problem in the near term," Evan Mann, an analyst with bond-research firm Gimme Credit LLC, said in a telephone interview.
"I think they're going to have a terrible second half."
Sears's earnings before interest, taxes, depreciation and amortization will drop to $225 million this year, from $626 million in 2012, according to Mann.
The company's ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) will increase to 15 times at the end of this year from 5 times a year earlier, Mann said.
Mann has an underperform rating on the company's $1.23 billion of 6.625 percent second-lien notes due October 2018.
They traded at 95.1 cents on the dollar Sept. 26, down from 101.3 cents on May 8, the high this year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The securities yield 7.81 percent, up from 6.35 percent in May.
Chris Brathwaite, a spokesman for the company, declined to comment on the financing.
"It doesn't solve any of their operational problems," Scott Tuhy, an analyst with Moody's Investors Service, said in a telephone interview. "It gives them more time to continue work on that."
Sears posted a $194 million loss in the three months ended Aug. 3, wider than its $132 million deficit from a year earlier, Bloomberg data show.
Interest expense eased to $59 million in the second quarter from $61 million in the previous period.
Fixed costs such as interest, capital expenditures and pension obligations are increasing in 2014, according to Tuhy. "It's going the wrong way."
The retailer's free cash flow shortfall will widen to $740 million in 2013 from $681 million last year, according to projections from Gimme Credit's Mann.
Sears will need to determine whether Kmart, which has underinvested in its food and drug business, has a viable future, according to a Sept. 24 Moody's report.
Wal-Mart Stores Inc. and Target Corp. have been willing to invest in their grocery business to drive traffic to their locations, while Kmart has fallen behind, according to the rating company.
Its market share has also been hurt by increasing competition from discount retailers such as Dollar General Corp.
Sears is controlled by its chief executive officer, Lampert, who owns 55 percent of the company's stock and some of its debt, according to a Sept. 18 Standard & Poor's report.
