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Fitch Affirms Sears Holdings at 'CC'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Ratings (IDR) on Sears Holdings Corporation (Holdings) and its various subsidiary entities (collectively, Sears) at 'CC'.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

EBITDA Remains Materially Negative: Fitch expects Sears' EBITDA to be in the negative $600 million range in 2015 and potentially worse in 2016. Fitch expects a revenue decline of around 20% in 2015 due to estimated domestic comparable store sales (comps) of negative 10% and ongoing store closings. Fitch expects comps to be in the negative mid-single digit range in 2016 and 2017 with top line decline potentially in the high single digit range as Sears continues to close stores.

Significant Cash Burn: Sears' interest expense, capex and pension plan contributions are expected to total $750 million-$800 million annually between 2015 and 2017. Netting this amount from Fitch's EBITDA expectation - and assuming $200 million-$300 million in net working capital benefit - leads to cash burn (CFO after capex and pension contributions) of $1 billion to $1.1 billion in 2015. Cash burn could potentially worsen in 2016, assuming EBITDA losses approach $800 million to $1 billion.

Shrinking Assets Fund Operations: Sears injected $3.1 billion in liquidity through August 2015 with $429 million from real estate joint ventures related to 31 stores with General Growth Properties, Simon Properties, and The Macerich Company (collectively 'joint venture') and $2.7 billion from the sale-leaseback transaction with Seritage Growth Properties (in which it sold 235 owned properties and its 50% interest in the joint venture). This is on top of the $6.8 billion (which includes expense and working capital reductions and debt financing activities) between 2012 and 2014 to fund ongoing operations given material declines in internally generated cash flow.

Further Asset Sales and/or Debt Funding Required Beyond 2015: Based on current EBITDA expectations, Fitch expects Sears to end 2015 with about $1.8 billion to $2 billion in liquidity. This assumes no additional asset sales above the $3.1 billion injected through August or debt issuance. As a result, Sears is likely to require an additional $1.3 billion to $1.5 billion in annual liquidity in 2016 and 2017 via further real estate transactions and/or higher borrowings, plus another $0.5 billion to fund annual seasonal working capital needs.

Below are potential sources of liquidity:

Fitch estimates that Sears still owns approximately 275 (excludes 125 of Sears full line mall stores that are in a bankruptcy remote vehicle and approximately 22 specialty stores) unencumbered Kmart discount and Sears full line mall stores. If the unencumbered real estate was valued at a similar price per square foot as the 235 properties sold under the Seritage transaction, Fitch estimates Sears could get an additional $2.6 billion in proceeds. However, the remaining portfolio could be of lower value if they are in smaller markets or declining malls and there could be restrictions on the sale of some of these properties. In addition there could be value in below market leases but the potential proceeds are difficult to estimate.

The company could also separate its Sears Auto Center business.

Finally, Sears' ability to issue incremental debt secured by receivables and inventory, which governs the borrowing base that determines the borrowing capacity on its existing credit facility (after netting out the first lien term loan and second lien secured notes, is limited given the significant reduction over the past few years in working capital.

KEY ASSUMPTIONS

--Fitch expects domestic comps of around negative 10% in 2015 and negative mid-single digit range in 2016 and 2017.

--EBITDA is expected to be approximately negative...


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