Sears Holdings recently received a $300 million loan from CEO Eddie Lampert’s hedge fund, but Moody’s says it’s not enough.
The investors service downgraded the retailer’s Speculative Grade Liquidity rating Tuesday, from SGL-2 to SGL-3, to reflect its view that Sears and Kmart will continue to rely on external financing and the monetization of its alternative assets—that is, sell more real estate—to fund its operating losses.
“We recognize the risks associated with relying on these sources and continued shareholder support to finance its negative operating cash flow which is estimated by Moody’s to be approximately $1.5 billion this year,” said Christina Boni, Moody’s vice president.
The note points out that the company lost $836 million during fiscal 2015 and its operating cash flow deficit (including pension and postretirement contributions) was roughly $2.2 billion. Despite the company’s sizable asset base, its debts are about $3.5 billion as well as an unfunded pension and post-retirement obligation of $2.1 billion.
“The ratings also reflect our view on the uncertainty of the viability of the Kmart franchise in particular given its meaningful market share erosion,” the note said, adding that the company will continue to face challenges in mitigating operating losses and reducing its high cash burn.
Sears said last month that comparable store sales at Kmart and Sears Domestic declined 3.3% and 7 percent respectively in the quarter ended July 30. As a result, revenue dropped to $5.2 billion, compared with the same period the year before. The price of Sears shares (SHLD) has plunged 42.17% year-to-date.