BL: Sears Can't Renew Letter of Credit on Same Terms (Update2)
By Lauren Coleman-Lochner
April 18 (Bloomberg) -- Sears Holdings Corp., the retailer being reorganized by hedge-fund investor Edward Lampert, said Bank of America Corp. refused to renew a $1 billion letter of credit under existing terms, sending the shares down 3.2 percent in late Nasdaq trading.
Losing the credit probably won't affect Sears's access to cash, the Hoffman Estates, Illinois-based company said in a regulatory filing today. The retailer had $1.62 billion in cash as of Feb. 2, a 58 percent decline from a year earlier.
Retailers use letters of credit to ensure vendors that they have money to pay for goods, and losing a bank's backing may mean having to borrow dip into cash reserves to pay for merchandise up front. Sears said it has a separate $1.5 billion letter of credit and only used $1.6 million of the Bank of America agreement, which expires in July.
``The company's cash has rapidly dwindled, and this would be a further blow to its financial flexibility if the letter of credit agreement is not replaced promptly,'' Carol Levenson, director of research at Gimme Credit, a corporate bond research firm, wrote in a report today.
Sears sales have declined the past four quarters with the drop in consumer spending as the U.S. economy hovers near a recession. Credit has become more difficult to obtain, with Talbots Inc. saying earlier this week that Bank of America and HSBC Holdings Plc canceled $265 million in letters of credit.
Yanking Credit
``If we weren't seeing other weak retailers falling by the wayside right and left, and the yanking of letters of credit agreements for Talbot's, also involving Bank of America this week, this wouldn't make us so nervous,'' Levenson wrote.
Bank of America spokeswoman Louise Hennessy declined to comment on the decision to end the agreements.
Sears declined $3.39 to $101.33 at 6:35 p.m. after the close of Nasdaq Stock Market composite trading. The shares gained 2.6 percent this year after falling 39 percent in 2007.
Sears's remaining $1.5 billion letter of credit is part of a $4 billion line of credit the retailer has with banks.
As of Feb. 2, the end of Sears's last fiscal year, $741 million was outstanding on the canceled letter of credit, and $974 million outstanding under the remaining credit, according to the company's annual report.
Sears spokesman Chris Brathwaite declined to say how much in letters of credit were outstanding today.
Increasingly tight credit has made it difficult for retailers to get enough cash to fund their operations. Borders Group Inc., the second-largest U.S. bookstore chain, put itself up for sale on March 20 and halted its dividend after it was unable to borrow money to fund store remodeling and new technology. The shares dropped the most since it went public almost 13 years ago.
The bookseller was forced to borrow from its largest shareholder, Pershing Square Capital Management LP, the hedge fund run by William Ackman.
To contact the reporter on this story: Lauren Coleman-Lochner at llochner@bloomberg.net.
Last Updated: April 18, 2008 20:21 EDT
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