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Summary

  • Sears' corporate bond maturing in 2018 has a yield at maturity of 9.6%.
  • Investors need to be cautious here due to company continuing to burn cash.
  • Investors should avoid this bond, as there is a big risk of the company being able to refinance its debt.

Sears (NASDAQ:SHLD) has reported another disappointing quarter. The revenue for the company fell 9.7% over the prior year. This is the ninth straight quarterly loss for the company, and it doesn't seem like things will let up anytime soon.

Analysts are predicting a loss of $3.60 per share just for the next quarter, which is greater than the $3.13 per share loss in Q3 2013. The company is continuing to close down stores, but the problem is still with the company's cash burn rate.

Sears has burned through another $750 million in cash this quarter. I believe this is something to consider if you are buying the bonds maturing in 2018. I am sure all the bond investors are aware of the dire situation.

Sears currently has two major debt maturities soon. One in 2016 and another in 2018. The line of credit is likely to make it out safely, due to additional measures the company is taking to raise liquidity. The line of credit, which has a borrowing capacity of $3.25 million, matures in 2016.

The LOC is likely to be paid off for the following reasons:

  • Sears can monetize its real estate portfolio to pay down debt.
  • Sears received a $500 million dividend from the spin-off of Lands' End.
  • Bank of America is exploring strategic alternatives regarding Sears' 51% stake in its Canadian business. As of August 19th, this stake is valued at $765 million.
  • Closure of 130 unprofitable stores will help stem the decline.

These solutions can support repayment of the line of credit. However, the issue is in regard to the bondholders that hold nearly $1 billion of debt. The corporate bond is maturing in October 2018, and has a yield at maturity of 9.6%. I do not believe this is a sufficient return for the level of risk that can happen at the time of maturity.

It is unknown how Sears will plan to refinance this debt when maturing time comes. This could be a very difficult situation for it if it taps out all of its assets in the next year. Investors should avoid this corporate bond, due the level of instability and lack of sufficient return.

The CUSIP for the bond is 812350AE6.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Avoid This 9%+ Yield