Risk Management

CDS Investors Bearish on Sears

The spread on a one-year swap contract to insure against a Sears default rose significantly this week.
Katie Kuehner-HebertFebruary 19, 2015
CDS Investors Bearish on Sears

The chances are increasing that Sears will follow in the footsteps of RadioShack and default on its debt and then possibly file for bankruptcy — at least that’s what some credit default swaps traders think.

According to CMA, a privately-negotiated market for credit swaps, the price of contracts insuring against a Sears default within a year rose to the equivalent of 1,434 basis points on Wednesday, Bloomberg reported. For five-year protection, the price was 1,247 basis points.

A basis point equals $1,000 annually on a contract protecting $10 million of debt. To insure a $100 million loan to Sears for one year, for example, it would cost a lender $14 million.

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The price increase for a one-year contract compared witha five-year contract reflects deteriorating investor confidence that Sears can avoid a default in the near term, Bloomberg wrote.

“It’s becoming increasing clear that this year is going to be the tipping point for liquidity,” CreditSights analyst James Goldstein told Bloomberg. “Their underlying retail model remains broken, and if it continues like this, it sucks the lifeblood out of whatever remaining value there is in its real estate.”

The Hoffman Estates, Ill.-based company, which has lost $7 billion over the past four years, has divested assets and received cash infusions from Eddie Lampert, one of its largest shareholders. Sears is also reportedly considering the sale and leaseback of up to 300 stores.

“Because Sears Holdings owns a lot of the real estate, it provides them with more cushion,” Bloomberg Intelligence analyst Poonam Goyal told Bloomberg. “Without the real-estate ownership, it would be very difficult for Sears to remain in operation given the decline in revenue.”

Last year Lampert participated in Sears’ $625 million rights offering and then loaned the troubled retailer $400 million.

“We remain highly focused on restoring our company to profitability,” Lampert said in a December earnings call with investors and analysts.