DJ CSFB/Sears -2: Retailer Will Have Credit Market Access
By James Covert and David Feldheim
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Sears Roebuck & Co. (S) may be penalized by having to pay higher interest rates, but otherwise it should be able to meet its financing needs for the foreseeable future with little difficulty.
So said analysts at Credit Suisse First Boston, investment bankers for the retail giant, in a conference call Thursday. They discussed the ability of Sears to meet its financing needs in the wake of unexpected management changes and charge-offs and lowered earnings forecast.
Sears has approximately $4.4 billion in credit lines from banks maturing in April, said CSFB's credit analyst Filippe Goossens. Given the uncertainties surrounding Sears' credit operation, a renewal of those lines will likely come at a higher cost to Sears, Goossens said.
Banks won't likely ask for collateral for a new credit line, but they may ask for restricted covenants that don't currently bind Sears' bank agreements, Goossens said. He added that, given growing skittishness among banks about the poor outlook for the retail industry, Sears' new bank line will likely be smaller than the current one.
"$3 billion would be a good number," Goossens said. He added that Sears "needs to wrap up the line over the next four to six weeks" to avoid jeopardizing terms of the deal.
Goossens also said that he expects Sears to increase its reliance on asset securitizations to meet its financing needs so it won't have a problem of access to the credit markets.
(MORE) DOW JONES NEWS 10-31-02
03:45 PM
DJ CSFB/Sears-3: Retailer Has `Unfettered Access' To ABS Mkt
Neil McPherson, head of ABS research at CSFB, said he believed Sears would have "unfettered access" to the ABS market, but added a caveat that this would probably be accomplished at somewhat wider spreads.
Considering the size of its credit card operation, McPherson said that Sears was a "light user" of the securitization market. Sears issuance this year will be in the area of $3.6 billion, he said. He sees the retailer with ABS refinancing needs of $2 billion in 2003 and $2.3 billion in 2004.
It will be very easy for Sears to sell $5 billion of asset-backed debt in 2003, and with just a little more difficulty it will be able to do $7 billion of securitized financing, said McPherson. If need be, he added, the market may be able to absorb as much as $10 billion of Sears credit card-backed notes.
Assets in the Sears Master Trust are of good quality, said McPherson. He said a key barometer of trust quality is excess spread - the difference between financing charges and fees and the trust's expenses, including charge-offs.
He said Sears excess spread "is not only healthy, but consistent and provides a cushion for possible higher losses."
Meanwhile, he said, the loss rate experienced by Sears on its credit card portfolio is at or below the industry average.
(MORE) DOW JONES NEWS 10-31-02
04:43 PM
DJ CSFB/Sears -4: `Structural Subordination' A Concern
However, one of the CSFB panelists did caution that if Sears dramatically increased its use of the ABS market, it could lead to some "structural subordination."
He said that in such a scenario, the ABS debt would represent a growing prior call on the company's assets at the expense of the unsecured senior debt. That could prompt the rating agencies might respond with some negative rating action on the unsecured liabilities.
Officials at Sears weren't available to comment.
The outlook for Sears' ratings was a concern of several callers as Standard & Poor's has placed the unsecured debt on Credit Watch Negative on October 18. The current S&P rating is single A-minus and there is concern whether the agency will lower it by one or two notches.
On Oct. 18, Moody's Investors Service confirmed its Baa1 rating but also gave the debt a negative outlook. Moody's had downgraded Sears in May. Neither agency has Sears commercial paper on review for downgrade.
Sears said on Oct. 17 that its third-quarter profit dropped 28% because of a surprisingly poor performance by its credit card business, which makes up more than 60% of Sears' total operating income. In response, investors that day sold the shares aggressively, sending them 32% lower in a single trading session.
Investors were spooked that Sears' third-quarter net of 59 cents a share fell drastically short of guidance of 80 cents to 82 cents a share that had been given only 10 days earlier. Management said it hadn't understood the full extent of its credit card problems at the time of the earlier guidance, which had included news that Sears fired the head of its credit operation - citing his "personal credibility."
Following the release of third-quarter earnings, Sears Chairman and Chief Executive Alan J. Lacy told investors that the former credit chief, Kevin Keleghan, "had become a barrier to our getting objective information about the business."
In response to an investor's question Thursday, CSFB equity analyst Michael Exstein said he's maintaining a neutral rating on Sears shares despite their current low price-to-earnings ratio because of uncertainties that linger in the company's outlook.
Earlier this month, Sears warned that it expected to miss its original earnings view of $5.15 a share for the current fiscal year. The company guided expectations down to $4.86 a share. CSFB currently estimates the company will earn $4.80 a share in the current fiscal year, and $5.40 a share in the next fiscal year.
"We spent a lot of time on the earnings estimate, but there is still not a lot of evidence that our suppositions are right," Exstein said.
In particular, Exstein said Sears still hasn't given a clear account of the factors that led to its $189 million increase of reserves for doubtful accounts in its portfolio of credit-card customers.
"Some of the assumptions used to calculate the reserves began to deteriorate, and were somehow ameliorated internally," Exstein said. "We haven't been told what those numbers are, and what metrics were involved."
CSFB analysts noted in particular that Sears said there is a "realistic expectation that it might have to add to the reserve" it expanded for doubtful accounts.
Michael Markowski, director of research at StockDiagnostics.com, a Sarasota, Fla., research firm, said the troubles at the Sears' credit-card operation have likely sapped the company's cash flow, regardless of the company's outlook for earnings.
Markowski expects Sears' third-quarter regulatory filings will show "a huge number for negative operating cash flow... we wouldn't be surprised to see them generate a negative half-billion dollars."
Those numbers are likely to make lenders nervous as the company approaches lenders to renegotiate more than $10 billion in near-term debt, Markowski said.
.-By David Feldheim, Dow Jones Newswires; 201-938-2018
david.feldheimn@dowjones.com
-By James Covert, Dow Jones Newswires; 201-938-5360
james.covert@dowjones.com
(Corrected 11-01-02)
(MORE) DOW JONES NEWS 10-31-02
05:22 PM
DJ CSFB/Sears -5: Sears Spokeswoman Declines Comment
A Sears spokeswoman later said the company doesn't respond to comments or opinions expressed during teleconferences in which it isn't a participant.
She said that's a matter of company policy.
(END) DOW JONES NEWS 10-31-02
05:35 PM
DJ CORRECTION: Markowski An Analyst At StockDiagnostics.com
Michael Markowski, director of research at StockDiagnostics.com, a Sarasota, Fla., research firm, said the troubles at the Sears' credit-card operation have likely sapped the company's cash flow, regardless of the company's outlook for earnings.
(In an item at 5:22 p.m. EST Thursday, the name of Markowski's firm was incorrectly stated as StockInvestor.com.)
(END) DOW JONES NEWS 11-01-02
10:54 AM |
