Capital Markets

BofA Yanks Sears Letter of Credit

The retailer's leadership doesn't expect the termination of the bank's agreement to affect the company's liquidity.
Stephen TaubApril 21, 2008

Sears Holdings, the embattled once-gilded retailing giant, said Bank of America will not renew a letter-of-credit agreement under its existing terms. The 364-day secured facility, which has a commitment amount of up to $1 billion, is slated to end in July.

As of last Friday, when Sears announced BofA’s action, only $1.6 million in letters of credit were outstanding under the agreement, which provides only for the issuance of letters of credit and does not provide for direct borrowings.

On Monday, the retail banking colossus reported that its quarterly net income dove 77 percent in the first quarter, adding that a burgeoning number of its customers growing number of its consumers have failed to repay loans, according to Reuters. “The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance,” said Kenneth Lewis, the bank’s chief executive officer.

Sears stated that nearly all of its outstanding letters of credit are issued under its $4 billion, five-year revolving credit facility, which expires March 2010. It has a $1.5 billion letter of credit sublimit. “We have maintained the LC Agreement as a facility to enable the company to cost-effectively issue letters of credit when surplus cash is available to collateralize the letters of credit,” the company stated in a filing.

Sears said it’s now using its $4 billion revolver for practically all of its letter of credit needs. It also said that its leadership doesn’t expect the termination of the Bank of America agreement to have any effect on the company’s liquidity.

The retailer also said that no early-termination penalties or fees would be incurred if the agreement were to terminate at the end of the current term. Further, the company is evaluating whether or not it will replace the agreement now, it stated.

Earlier last week, BofA stripped Talbot’s, a retail clothier, of a letter of credit agreement, with a tumultuous reported 40 percent negative effect on Talbot’s share price. In a new report on Sears, Gimme Credit noted that BofA removed its letter of credit from Talbot’s amid an increasingly troubling overall retail environment in general. “Knowing how sensitive the market is to liquidity issues these days, one would think that Sears would have gone to great lengths to renew this bank agreement even if, as the company claims, its loss does not have any effect on its liquidity,” the credit research firm stated. “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.”

The research firm also asserted that the goal of making the merged Kmart and Sears into a retailing success has become increasingly less achievable, as same-store sales plunge “and excuses abound.”

It added that with an underleveraged balance sheet, the most viable alternative to boost the stock price remains some feat of financial engineering. However, it warned that this is “unlikely to be beneficial to the credit profile.”

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