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Sears CEO Eddie Lampert to Cut His Own Lending to Sears; Vote of No Confidence?

Already interpreted by some as an expression of a lack of confidence in his own company, Sears Holding Corp. CEO Eddie Lampert will dramatically reduce the amount of lending he provides to the slumping retailer.

Lampert’s hedge fund, ESL Partners LP, is slowing down its supply of commercial paper–or short-term debt typically assumed to cover the cost of daily operations–to Sears. Sears owes ESL $285 million in IOUs. Some financial analysts interpret ESL’s reluctance to continue the steady stream of dollars to Sears as an indication that Lampert is insulating himself against personal losses by diminishing his exposure to Sears’ troubles. “If he has billions of dollars of his own net worth tied up in Sears, and if he’s reducing the exposure, that’s not necessarily a good thing,” said Matt McGinley, managing director at International Strategy & Investment Group.

Sears has suffered from debilitating liquidity problems, especially in the last year. Just recently, Sears secured a term loan of $1 billion in order to refinance already existing debt. The loan replaces Sears’ existing $3.275 billion asset-based credit line. A spokesperson from the ailing retailer said that the loan will be secured by the same collateral already in place. Lampert personally owns 25,120,220 shares of the retail giant, about 23 percent of the company. Lampert also personally owns $169 million of Sears’ commercial paper debt.

Sears’ free cash-flow has been negative in each of the last four consecutive years, with a staggering outflow of $1.44 billion. If Sears doesn’t locate additional financing soon, it will likely burn through its available cash reserves in the next nine months or so. McGinley said, “Their liquidity picture overall has not improved over the course of the past several years, and it hasn’t improved because the core operations of Sears are an absolute disaster.” For the investors who still use the investment thesis that Eddie Lampert is a smart guy, well, Eddie Lampert is a smart guy, and guess what, he’s reducing his exposure to Sears.” Sears maintains approximately $3.8 billion in outstanding bond and loans in total.

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ESL has had its own share of problems related to its financing of Sears, including a mutiny last year of investors demanding their money back, no longer confident that the retailer was a safe bet. A group of investors largely comprised of large institutions all participated in a 2007 deal brokered by Goldman Sachs which raised a whopping $3.5 billion in capital. The redemption requests were issued just in advance of the expiration of a five-year period that insulated that money from being withdrawn. The funds will be distributed gradually in several different forms, including stock in other investments. Lampert’s hedge fund still houses more than $2.5 billion.

At the time the money was originally invested, ESL was renowned for its consistent success, enjoying annualized returns that topped 20 percent for more than twenty consecutive years, often bettering the S&P500 stock index. However, the success of ESL is intricately bound up with the fortunes of Sears ever since Lampert took over as CEO. ESL is the biggest holder of Sears stock and has suffered from its spiraling decline.

Sears’ fourth-quarter results did little to further inspire investor optimism. The net loss for the fourth-quarter which ended February 1 contracted to $3.37 per share from $4.61 per share, or $358 million. Revenue for the quarter slipped 14 percent to $10.6 billion.

Sears Holdings’ comparable store sales dipped 6.4% for the quarter to date in the U.S. and 4.4% in Canada. Comparable sales for Sears stores in the U.S. are down 9.2% in the nine weeks that ended January 6, and down 5.7% for Kmart. ShopperTrak reported that U.S. retail sales for the industry at large have risen 2.7% for the same period.For the fiscal year, Sears expects a loss as large as $914 million, potentially amounting to $8.61 per share. This is considerably worse than the loss of $6.20 per share most analysts have been predicting.

Sear has tried to stanch the bleeding by cutting costs, reducing overhung inventory and selling off assets. In the last fiscal year, this strategy has decreased its net debt by $400 million and raised $1.8 billion in new cash.

The retailer has also raised capital by selling off its realty, often choosing the best performing stores because they command higher purchase prices. Unable to reinvigorate languishing sales, Sears has relied upon the value of its realty as a centerpiece of its turnaround strategy. In 2012, Sears earned more than $47 million in revenue from multiple leasing arrangements. Since 2011, Sears had leased major commercial space to other marquee retailers: Whole Foods, Forever 21, Bay Club and Northgate Gonzalez Markets have all moved into space operated and formerly occupied by Sears.

Some industry experts have speculated that Eddie Lampert was originally attracted to Sears precisely because of the value of its real estate. One of Sears’ investors, Baker Street Capital, issued a report recently that the retailer’s 350 remaining locations were collectively worth $7.3 billion. Consider that Sears’ total market capitalization is approximately $600 million. Since 2010, Sears has closed more than 300 stores. In 2013, Sears raised nearly $1 billion from real estate sales. In 2012, the retailer’s realty proceeds reached $618 million.