Hoffman Estates, IL—Sears Holdings is borrowing $400 million from an investment fund headed by the department store retailer’s chairman and CEO Edward Lampert, in a move that comes days after Fitch Ratings lowered its credit rating on the company.
The loan is being made by entities affiliated with ESL Investments, in which Lampert is the sole shareholder.
The retailer said in a filing that it expects to use the proceeds of the loan for “general corporate purposes,” adding that the maturity date could be extended from December 31 to February 28 as long as Sears does not default on its terms.
‘CEO With Worst Reputation’
The news follows a downgrade in Sears Holdings’ credit rating last week by Fitch Ratings amid concerns over the “magnitude of Sears’ decline in profitability and lack of visibility to turn operations around.”
Downgrading the company to double-C from triple-C, Fitch warned funding options “may not be enough to support operations beyond 2016 given the significant cash burn in the business.”
The ratings firm expects the retailer, which operates the Sears and Kmart stores, to post an EBITDA deficit of $1 billion in 2014, “and potentially worse in 2015,” with revenues seen contracting by 9% to 10%. Gross margins are expected to contract another 200 bps to 22%, on top of the 220 bps contraction in 2013.
In contrast, the company needs to generate a minimum EBITDA of $1 billion annually between 2014 through 2016 to service its cash interest expense, capex, and pension plan contributions, it believes.
Fitch concludes that given the high rate of cash burn in the business, Sears is likely to have to restructure within the next two years.
Lampert may be acting in a somewhat white knight role for Sears Holdings, but his reputation as a chief executive has been a target among analysts. Earlier this year, 24/7 Wall Street named Lampert “the CEO with the worse reputation.”
A Businessweek profile of the company last year criticized Lampert for pitting divisions against one another. This, according to the article, has discouraged divisions from collaborating. “According to one reviewer on Glassdoor, ‘communication from top levels is weak,’ a common complaint for the CEOs with the worst reputations,” 24/7 stated.