Fitch Affirms Sears Holdings' IDR at 'CCC'; Outlook Negative

  Fitch Affirms Sears Holdings' IDR at 'CCC'; Outlook Negative

Business Wire

NEW YORK -- December 05, 2012

Fitch Ratings has affirmed its long-term Issuer Default Ratings (IDR) on Sears
Holdings Corporation (Holdings) and its various subsidiary entities
(collectively, Sears) at 'CCC'. The Rating Outlook is Negative. A full ratings
list is shown below.

The magnitude of Sears' decline in profitability and lack of visibility to
turn operations around remains a major concern. Fitch expects 2012 EBITDA
could be in the range of $400-$500 million mainly on significant expense
reduction of $500 million as the top line is expected to decline in the 8-9%
range leading to gross profit dollar contraction. EBITDA is expected to remain
under pressure and could potentially turn negative in 2013, unless the company
continues to offset gross profit dollar declines with expense reductions.
Fitch expects top line contraction in the 8-9% range in 2013 and mid-single
digit range in 2014, due to domestic comparable store sales (comps) in the
negative 3% range, store closings, and spin-off of certain businesses. The
2012 and 2013 revenue estimates reflect the spin-off of Sears Hometown and
Outlet businesses and certain hardware stores in October 2012. These assets
represented approximately $2.3 billion-$2.6 billion in revenue and $70
million-$80 million in EBITDA in 2011.

Fitch estimates that Sears will need to generate a minimum EBITDA of $900
million to $1 billion in 2013 and 2014 to service cash interest expense,
capital expenditures, and pension plan contributions. As a result, Sears will
need to continue funding operations with increased borrowings and/or asset
sales and may need to access external sources of financing. Liquidity remained
adequate to fund 2012 working capital needs given the availability under
Sears' U.S. and Canadian facilities, significant reduction in inventory and
recent asset sales/spin-offs. If Sears is unable to access the capital markets
or find other sources of liquidity, and EBITDA remains at the current level or
lower, there is a risk of restructuring over the next 24 months.

Domestic Sears and Kmart stores have been underperforming their retail peers
on top-line growth for many years. The combined domestic entity has lost $9
billion, or almost 20%, of its 2006 domestic revenue base through the end of
2011, leading to tremendous pressure on profitability. This reflects
competitive pressures, inconsistent merchandising execution and the lack of
clarity about its long-term retail strategy. Fitch expects both Kmart and
Sears will remain share donors. Sears' comps are expected to be in the
negative 2%-3% range in 2012-2014, while Kmart's comps are expected to be in
the negative 3-4% range. Sears Canada has also been very weak over the past
three years with comps in the negative mid-to-high single digits.

As of Oct. 27, 2012, Sears had $1.5 billion of borrowings under the domestic
revolver, with $1 billion of availability under its domestic $3.275 billion
credit facility due 2016 and $433 million under its CAD$800 million credit
facility due 2015. The availability under its domestic revolver was
essentially the same as last year while the Canadian availability was almost
approximately $360 million lower (with $300 million due to reserves that could
be applied by the lenders unless the company pledges additional collateral).

The availability under the domestic revolver remained essentially flat because
Sears injected close to $2 billion in liquidity this year to fund operations
given the significant shortfall in EBITDA beginning last year. Actions taken
included: (1) peak inventory reduction of $575 million including $200 million
from store closings; (2) $500 million in expense reduction; (3) $440 million
from the sale of certain properties and (4) $450 million from the spin-off of
its Hometown and Outlet businesses.

Given the current level of EBITDA and Fitch's expectation that it could
deteriorate in 2013, Sears will need to continue to reduce inventory, cut
costs and sell assets to fund operations. Sears has the ability to issue $1.75
billion in secured debt as permitted under its credit facility ($1 billion
accordion feature to upsize the domestic credit facility and $750 million in
second lien debt). However, it could have difficulty tapping into this debt if
operating trends continue to deteriorate, especially if credit market
conditions are adverse at that time.

Recovery Considerations for Issue-Specific Ratings:

In accordance with Fitch's Recovery Rating (RR) methodology, Fitch has
assigned RRs based on the company's 'CCC' IDR. Fitch's recovery analysis
assumes a liquidation value under a distressed scenario of approximately $6.5
billion (low seasonal inventory) to $7.4 billion on (close to peak seasonal
inventory) on domestic inventory, receivables, and property, plant and
equipment.

The $3.275 billion domestic senior secured credit facility, under which Sears
Roebuck Acceptance Corp. (SRAC) and Kmart Corporation (Corp.) are the
borrowers, is rated 'B/RR1', indicating outstanding (90%-100%) recovery
prospects in a distressed scenario. Holdings provides a downstream guarantee
to both SRAC and Kmart Corp. borrowings and there are cross-guarantees between
SRAC and Kmart Corp. The facility is also guaranteed by direct and indirect
wholly-owned domestic subsidiaries of Holdings which owns assets that
collateralize the facility.

The facility is secured primarily by domestic inventory which is expected to
range from $7 billion to $8.5 billion around peak levels in November, and
pharmacy and credit card receivables which are estimated to be $0.5 billion.
The credit facility has an accordion feature that enables the company to
increase the size of the credit facility or add a first-lien term loan tranche
in an aggregate amount of up to $1 billion and issue $750 million in
second-lien debt. The credit agreement imposes various requirements, including
(but not limited to) the following: (1) if availability under the credit
facility is beneath a certain threshold, the fixed-charge ratio as of the last
day of any fiscal quarter be not less than 1.0 times (x); (2) a cash dominion
requirement if excess availability on the revolver falls below designated
levels, and (3) limitations on its ability to make restricted payments,
including dividends and share repurchases.

The $1.25 billion second lien notes due October 2018 at Holdings are also
rated 'B/RR1'. The notes have a second lien on all domestic inventory and
credit card receivables, essentially representing the same collateral package
that backs the $3.275 billion credit facility on a first-lien basis. While
Fitch has not made a distinction between the first- and second-lien notes at
this point given the significant collateral backing the notes and facility, it
could do so in the future should Sears be able to exercise the accordion
feature under the credit facility, issue additional second-lien notes or the
assets serving as collateral continue to decline materially. The notes contain
provisions which require Holdings to maintain minimum asset coverage for total
secured debt (failing which the company has to offer to buy notes sufficient
to cure the deficiency at 101%). The senior unsecured notes are rated
'CCC/RR4', indicating average recovery prospects (31% - 50%). While the credit
facility and second-lien notes are overcollateralized currently and the
spill-over could provide better than average recovery prospects for the
unsecured bonds, factors considered in assigning the recovery rates include
the potential sizable claims under lease obligations and the company's
underfunded pension plan. The SRAC senior notes are guaranteed by Sears, which
agrees to maintain SRAC's fixed-charge coverage at a minimum of 1.1x. In
addition, Sears DC Corp. (SDC) benefits from an agreement by Sears to maintain
a minimum fixed-charge coverage at SDC of 1.005x. Sears also agrees to
maintain an ownership of and a positive net worth at SDC.

What Could Trigger a Rating Action

A negative rating action could result from further deterioration in credit
metrics or a significant decline in liquidity. Although Sears has the ability
to potentially add $1.75 billion in secured indebtedness under its covenants
and pull other levers to shore up liquidity, the magnitude of the decline in
profitability and the lack of visibility to turn around operations remain a
major concern.

A positive rating action could result from a sustained improvement in comps
and EBITDA to a level where the company is covering its fixed obligations.
This is not anticipated at this time.

Fitch has affirmed the ratings as follows:

Sears Holdings Corporation (Holdings)

--Long-term IDR at 'CCC';

--Secured bank facility at 'B/RR1';

--Second-lien secured notes at 'B/RR1';

Sears, Roebuck and Co. (Sears)

--Long-term IDR at 'CCC'.

Sears Roebuck Acceptance Corp. (SRAC)

--Long-term IDR at 'CCC';

--Short-term IDR at 'C';

--Commercial paper at 'C';

--Senior unsecured notes at 'CCC/RR4'.

Kmart Holding Corporation (Kmart)

--Long-term IDR at 'CCC'.

Kmart Corporation (Kmart Corp)

--Long-term IDR at 'CCC'.

Sears DC Corp. (SDC)

--Long-term IDR at 'CCC'';

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'. The issuer did
not participate in the rating process other than through the medium of its
public disclosure. The ratings above were unsolicited and have been provided
by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology'(Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Nov. 13, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

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Contact:

Fitch Ratings
Primary Analyst:
Monica Aggarwal, CFA
Senior Director
+1-212-908-0282
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Isabel Hu, CFA
Director
+1-212-908-0672
or
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Sharon Bonelli
Managing Director
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or
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brian.bertsch@fitchratings.com
 
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