Observers have been predicting the demise of Sears for years, but the company isn't out of options yet. The Toronto Star/Zuma Press
The limits of Sears Holdings Corp.'s cash are coming into sight.
The struggling retailer is selling off assets to raise money as its operations continue to produce red ink. But even if those sales go as planned, credit analysts say, the company could find itself short of funds by the end of 2016.
Sears's troubles were underscored Monday, when the company said it had agreed to borrow $400 million from the hedge fund run by Edward Lampert, the company's CEO, chairman and biggest shareholder. Mr. Lampert's ESL Investments Inc. has made short-term loans to Sears in the past by buying the company's commercial paper, but those loans were unsecured.
This time the loan—which will come due in just over three months and is aimed at helping the company get through the holidays—is backed by 25 Sears properties.
"It's significant that Eddie is taking less risk, whereas before he was willing to take more risk by providing unsecured financing," said Mary Ross Gilbert, a managing director at Imperial Capital, a boutique investment bank.
Chris Brathwaite, a Sears spokesman, said that Mr. Lampert continues to have a lot at stake in the company, which has plenty of assets. That gives "us great flexibility in ensuring that we can continue to invest in our transformation while meeting all of our financial obligations," Mr. Brathwaite said.
In a filing Thursday, hedge fund investor Bruce Berkowitz said an affiliate is in talks about participating in the loan with an investment of up to $100 million. Mr. Berkowitz and his funds own 24% of Sears, according to the filing.
ESL held $285 million and $250 million of Sears's commercial paper in early 2013 and 2012, respectively, but it held none on Feb. 1. Mr. Brathwaite said the new loan was at favorable terms and a more predictable source of funding than commercial paper. The company is working on a longer-term solution to address concerns about its cash, he said.
Among those concerned are Sears's suppliers. Some are dealing with limits on how much inventory they can finance as creditors cut back, according to a person who provides suppliers with financing. One said he was troubled that Sears had to pledge properties to secure the loan from Mr. Lampert's fund.
"As a vendor, one has to ask if cash flow is that tight that ESL needs to lend the money. And why is it taking first dibs on so-called valuable real estate if that is what the vendors had counted on if things further deteriorate?" Gary Balter, a Credit Suisse analyst, wrote Thursday in a note to clients.
The company's shareholders and bond investors appear to be skittish, too. Sears's shares have dropped since Mr. Lampert's new loan was disclosed, and at $28 they are down nearly 30% so far this year. Meanwhile, the cost of insuring some of Sears's bonds has increased by 65% since the beginning of the year, reaching levels not seen since January 2012, according to Diana Allmendinger, a director of Fitch Solutions.
Mr. Brathwaite, the Sears spokesman, pointed out that the 25 properties are a small portion of Sears's roughly 1,900 stores, a majority of which are leased.
The new loan could be extended until Feb. 28 if Sears doesn't violate the terms. It will give a near-term boost to the company, which burned through $747 million in the first half of the year. But Sears needs to reverse a drop in sales and start generating more cash if it is to remain viable.
Sears's operations currently don't produce enough cash to cover what the company needs to spend on pension contributions, interest payments on its debt, and investments in its stores and website, according to an analysis by Fitch Ratings.
The company has plugged the gap by spinning off its Lands' End unit to shareholders, selling some real estate and obtaining the loan from Mr. Lampert's hedge fund. All told, those activities will have brought in about $1 billion this year.
More money will be needed unless the company can turn around its Sears and Kmart stores. Losses have totaled about $6.4 billion over the past 3½ years, including a loss of nearly $1 billion in the six months through Aug. 2 as revenue in the period fell more than 8%.
Observers have been predicting the demise of Sears for years, but the company isn't out of options yet. It is evaluating possibilities for its 51% stake in Sears Canada as well as Sears Auto Centers. And it could raise more debt backed by its inventory and real estate. Those measures, along with closing more stores, could put $4 billion to $6 billion into Sears's coffers, enough to see the company through 2016, according to Monica Aggarwal, a senior director at Fitch.
"What happens after 2016 is the big question," Ms. Aggarwal said. "The chance of a restructuring is high."
Analysts said that Sears, which is paying an annual interest rate of 5% plus an upfront fee of 1.75% on the new loan, likely received terms at least as favorable as it would have from an unaffiliated lender. Mr. Brathwaite said the loan was approved by the company's board and complied with its code of conduct governing monetary arrangements between directors and the company.
Still, Mr. Lampert's presence on both sides of the deal raised concerns.
Erik Gordona clinical assistant professor at the University of Michigan Ross School of Business, said: "You can understand how some investors could suspect that it's an early step in Lampert's endgame."