Credit-Equity Disconnect 101: Sears CDS Soars By 700 bps To Over 2400 As Stock Closes Higher
Yesterday when we discussed the imminent demise of Sears following the CIT liquidity withdrawal we said "ignore the stock price which is now purely a function of momo chasers in either direction, and just focus on the CDS." Sure enough, nowhere could we see a better example of just how unprecedented the disconnect between stocks and credit is than in Sears, which unfathomably saw its stock close higher on the day, following a grotesquely stupid market reaction to an announcement that Tepper was forced to buy SHLD stock (which as DealBook explained was an indication of liquidation, confirming that stocks are now purely traded on headline reaction without absolutely any insight into what is going on). Yet the real question is what is going on in CDS land, and what is going on is basically a confirmation that it is game over for the company: as the chart below shows, default swaps in the name are over 700 bps wider today, and have doubled in the past two days, closing the 11th at 1275 bps, and 48 hours later trading double, at 2432 bps. Expect the stock, once it can be shorted again when Tepper has no choice but to release it from HTB state, to plummet quite shortly as the reality dawns for even the momos.
and....
Sears Chairman Buys Shares, but His Reason Is Unclear
BY PETER EAVIS
Vincent Laforet/The New York TimesEdward Lampert, seen in 2004, controls just under 60 percent of the shares of Sears Holdings.When big-name investors increase their personal stakes in stocks, the purchases can be a positive sign for the companies.
Edward S. Lampert sent a murkier message this week after buying extra shares inSears Holdings, the troubled retailer.
Mr. Lampert, who controls just under 60 percent of the retailer’s shares through his hedge funds and his own portfolio, recently added another $130 million of Sears stock to his personal holdings. But he did not acquire it in the open market from outside investors. Rather, he bought the shares from his hedge fund, ESL Investments, according to a regulatory filing on Wednesday.
It could be a sign his hedge fund investors are dissatisfied.
As of November, Sears made up 30 percent of the holdings of RBS Partners, a $9 billion investment vehicle related to ESL Investments. That holding has been a drag on performance. Over the last 12 months, shares of Sears are down about 55 percent, with the stock being pummeled late last year after disappointing holiday sales.
Mr. Lampert may be under pressure to meet redemptions from his hedge funds. Other regulatory filings suggest that investors have been pulling out in recent weeks.
At the end of 2011, Mr. Lampert’s hedge fund entities returned roughly $1 billion to investors. These distributions — which, unusually, took the form of AutoZone shares, not cash — were done as part of fund restructurings and a wind-down of a portfolio.
It is also not clear how much Mr. Lampert has increased his personal stake in Sears with the $130 million purchase. As a manager of his hedge funds, he already had indirect and sizable economic exposure to Sears. Mr. Lampert, who serves as Sears chairman, also took $17 million worth of the company’s shares from a hedge fund entity in place of cash management fees.
A spokesman for Mr. Lampert declined to comment on investor redemptions.
Since 2008, Mr. Lampert has been feeling heat for his Sears investment. Over the last three years, the company has consistently reported disappointing sales, in part because it has not spent enough money updating its stores, critics say.
The poor sales may now be leading to a cash squeeze. Sears forecasts that cash flows for the quarter that will end this month will be less than half what they were in the year-earlier period.
With the retailer’s financial situation deteriorating, one lender, the CIT Group, has stopped making cash advances to Sears’s suppliers. This could intensify Sears’s woes.
When these advances dry up, suppliers often demand immediate payment for the goods they sell to the retailer. Or they may ask the retailer for a letter of credit, under which a bank guarantees payments.
If suppliers make such demands, they can deplete the retailer’s cash and drain bank credit lines. Both contributed to the 2008 demise of the electronics retailer Circuit City.
In a statement, Sears said it had ample access to cash through bank lines. It also said it disagreed with CIT’s action and noted that the lender’s advances represented “less than 5 percent” of Sears’s inventories. Bloomberg News earlier reported on CIT’s decision.
But the pullback by CIT could make a big dent in Sears’s cash if the retailer cannot find other lenders.
Sears had $10.2 billion in inventory at the end of October. Should Sears have to find cash and letters of credit to pay suppliers for 5 percent of that amount, it could need $510 million.
Fitch Ratings said Thursday that 5 percent of its 2012 Sears inventory forecast would equal $400 million to $450 million. In any case, Fitch said in a report, CIT’s move reduced the retailer’s margin of safety.
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