No. of Recommendations: 3
Anyone else holding or watching Sears Holdings at all?

This exchange traded debt (ticker SBCKO / cusip 812404507) is one I've picked up more than my share of over the winter. It is EXTREMELY thinly traded on the OTC gray market (like pink sheets except there is no publiched bid or asks - you just make a bid and wait to see if it fills).... which scared me at first... and then I dug into the back story. At the time they were trading at about a 42% yield (interest yield, NOT YTM) and were tied to sears, so i did a bit of research.

HUGE POINT:::: This isn't something to jump into lightly, because of the OTCOC Gray market, you very well may never be able to sell these to anyone at any price. You may have no choice to hold until maturity, there is no market maker for these.

Sears Holding is a company I've followed and own some common stock in, and when the market OVEREREACTED big time by dropping SHLD's price to sub 30s, I looked into their debt offerings and found 2 issues - exchange traded debt; $25 Liquidation preferrences; SBCKO and SBCKP.

The good: Sears holding has taken Sears cash generating options and a few years back bought KMART out of bankruptcy, now they own a handfull of operating stores (Sears, Kmart, Orchard hardware, a financial interest in Sears Canda) and more brands (DIEHARD, LANDS END, KENMORE, CRAFTSMAN,...), they have many mall locations with unbelieavbly atttractive lease term.

The Bad: Obviously, the market is pricing them like they are pricing all retail. they are bigger and have more exposure.

But this company generates a huge amount of cash and has been buying back stock AND DEBT. And that takes me back to where this story started.

June of 2005, Sears decided it needed to get rid of debt and/or had a desire to end reporting financial results for the Sears Roebuck Acceptance Corp subsidiary and since he had these two issues registered and listed directly with SRAC and not SHLD, he made a tender offer for full value , bought back 50.5% and 46.1% of the notes respectively, and ended the listing on the NYSE for this E.T.D. (it was announced at the same time as the tender offer). This is why they trade on the gray market, not because they're some institution no one has heard of, or because there are shaky / shoddy financials, no SHLD at the very least wanted to stop publishing the financial info for this subsidiary that would be required as part of having it listed on NYSE (it's financials are already wrapped up in SHLD's reporting).

I've reviewed SHLD and I don't think they're going out of bussiness any time soon; the Ba2/BB- implies there is a possibility. I think they'll come out of this downturn in a stronger relative position as many competitors are going out of business.

I ended up buying, I'm not so sure anyone else needs to take the same risk, I DO KNOW YOU NEED TO DO SOME SERIOUS HOMEWORK if you're so inclined on this one in particular, and in the spirit of discussion, I'm throwing it out there.

To illustrate how illiquid this one is, while acquiring my position in this, I had buy orders for 100 unit lots open for weeks at a time, and on more than one occasion, 100 units lots moved at well below my bid price without my order filling, because there is no market maker - there is no guarantee that anyone will see your bid out there, or that someone who is selling at Scottrade will end up getting hooked up with someone buying at E*Trade, etc...


I didn't do yield curves back when I decided to start acquiring, but I did one today thanks to what I've gleaned from the posts here in the past few months....

I did a quick yield curve for all of Sears debt on E*Trade and it's trends down from about 30% for May debt(4 weeks away) (make sure you use yesterdays actual sale of the 2011 debt at $80.40 and not the sell offer of 70.25 when you plot your curves). The the debt for 2011-2017 is yeilding low-20% and then the debt out in 2020-2030 drops down to 17-18%.... and then these two exchange traded debt items in 2042 and 2043 calc out in the neighborhood of 50% YTM. Talk about something that jumps off the yield curve at you.

I believe that some of the discussion (which I haven't completely kept up with but have much of printed out for future reading) on yield curves suggests that an inverted yield curve is bad.

I tend to read this yield curve to say that people who expected return of capital in the next 5-6 years are spooked (rightly so) by the current climate, but the buyers in general have more upbeat prospects for the long term viability of this company (at least the people buying bonds are concerned - 17%-18% ytm). I get that, retail is stressed, people want to hedge their bets and are willing to take $.70 today to know they've got their money.

But these two exchange traded debt instruments are just off the beaten path enough to get 3 times the YTM as a similar bond with a just slightly (on a relative basis) shorter expiration. Is there really 34% more risk that pops up the morning of June 2nd, 2032?

Simply because they're off the beaten track, these appear to me to be some low hanging fruit. The prospectus states they rank equally with all of SRAC's other unsenior unsubordinated debt. (You can read the prospectus by going to quantumonline.com and searching for SBCKO or SBCKP.

Plus, the consolation for me is that by the time that 2011 rolls around for the sellers who today are worrying about their return of principal.
I will be playing with the houses money.

My approach on these is quite different, I'm nowhere near counting on the return of principal to pay my housing bill or buy groceries, so I can be more aggressive because of the time I have. With any luck on at least three fronts, I'll be in my second year of social security when these notes mature, which lets me feel comfortable being markedly more aggressive.

Interested to hear anyone's thoughts, we're here to learn.

Scott
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Scott,

My, my my, aren't you the busy beaver?

As for Sears bonds, I own 'em. Twice in fact. Once when shares came to me though the K-Mart reorg. blew out the shares at a profit, but not as big a one as if I held longer. Later, I bought the bonds directly. Also, I own Abertson's bonds. Different industry but some of the same kinds of numbers and analytic problems.

My current position in Sears is tiny: 3 of their 7.5's of '27, and 5 of their 6.5's of '28. I haven't yet marked myself to marked this weekend on them. But the numbers won't be pretty, down by half or more from my entries 9/08 and 5/08.

You know, the guy who really ought to chime in on this is number-crunching Jack. This is exactly the sort of situation which my style of chart-and-tape reading is useless. The company's numbers are what matter, because that's what a Chapter 11 workout will be based on. One of the key facts about retailers like Sears is whether they own or lease the land their stores are sitting on. GAAP rules don't value land properly. It's carried a book, not at current value. I made a killing years back with another such retailer, ShopKo (now taken private).

I had been reading the annual report for a value stock fund looking for bond ideas. One of Oakmark's managers was arguing the case for acquiring ShopKo's common, because ShopKo typically owned their land instead of leasing it. I didn't even finish the paragraph. Immediately, I went online and bought every ShopKop bond I could find, because I knew I was buying Chapter 11 downside protection. Ironically, the "float" was tiny, less than ten bonds spread across three maturities, which was another good sign. The big boys were sitting on the bonds. Eventually, one position got called and another matured. But I still own five of their 9 1/2's of '28. The bonds don't trade, but they pay coupons like clockwork, and my YTM is 19.3%.

In the case of Sears, I'm guessing there's beaucoup supply. So this isn't a situation that has to be hurried. There's time to do proper due diligence and to grind through the SEC filings. In fact, now that I think about it, now might be a very good time to learn how to apply Z-Scores to Sears' numbers.

You're a sweetie. Love and Kisses for, once again, calling something to my attention. But nothing further is going to happen until I'm back from my bike ride. Now that the sun has returned and the traffic is off the back roads due to it being a weekend, it's time to be outside.

Charlie
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Charlie,

Not sure if you happened upon Eddie lampert's letter to shareholders from February 26, 2009, but this gem is well worth the read imho.

http://www.searsholdings.com/invest/



Scott
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Scott (and all),

Should Sears' bonds be bought? I don't know. But I do know that learning how to know is worthwhile. What I'm going to do --and what I'd suggest that anyone else who is following this thread to do -- is this:

TENTATIVELY, make no effort to understand Scott's original post (or anything I or anyone else says about Sears) UNTIL you have done your own due diligence. THEN, AND ONLY THEN, with your own set of facts and interpretations in mind, see how what you arrived at compares to what other people are arriving at.

On other words, someone has just given you a hot tip: Sears' bonds might be worth buying. How do you evaluate that tip? If you can't say yea or nay in a disciplined manner, how are you going to be able to evaluate what anyone says about any investment? Your learning has to start someplace, and the learning is a lot easier when lots of people are contributing. This is a golden learning opportunity. Seize it.

Later, Charlie
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I believe that some of the discussion (which I haven't completely kept up with but have much of printed out for future reading) on yield curves suggests that an inverted yield curve is bad.

Scott,

I do NOT like to see negative yield-curves. It implies that the secondary bond-market is pricing the debt according to an estimated, Chapter 11 workout-price. If I didn't already own Sears bonds, and if I were shopping for new investment, I would exclude Sears from further consideration. I have not done quantitative studies, but my gut feelings and general remembrance is that the predictive reliability is 90-95%, or at least way, way better than a coin flip.

In other words, betting against negative yield-curves takes one into territory way beyond value investing. "Special situations" investing is more like it, and that is a specialization that requires very superior analytical skills of the sort typical of professional shorts. In other words, you gotta be very sure of your abilities to interpret financial statements. (I'm weak, and I know I'm weak.)

That said, the CEO, Lambert, is no dummy, as his long, long "Letter to Shareholders" suggests. The company is hugely complex. Reading the 10k is exhausting work. But the numbers look reasonable in terms of company survival. Immediate-term profitability is another matter. But Sears is doing no worse than the relevant benchmark indexes (of which, obviously, it is a member.)

Bond pricing is total chaos. I have no idea what's going on. I'm going to have to go through each of their outstanding issues, one by one, chart by chart, to estimate at what price the bonds, really, might be bought. From T&S, I'm seeing transactions that are total chaos. Not just wide spread, total chaos. Obviously that presents opportunities. But, first, it has to be determined whether they should be pursued.

Two lines of attack I haven't done yet are "Intrinsic Value" estimates and Z-Scores. That will be tomorrow's project, as well as the bond chart work.

This is not an easy situation to game. Kudos to you for the huge amount of work you've done.

Charlie
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As an interesting comparison for how markets treat exchange traded debt in it's various forms, look at a yield curve of JC Penney debt and add in the current 16% or so yield of ticker: JBS (cusip 21988T207) Select Asset, Corp Bkd Call Trust Cert. 2007-1, 7% J.C. Penney Debentures (which matures 3/1/2097).

There is still a premium for the exchange traded debt relative to a true bond maturing the same day.

A sizable premium, but not the 34% we see at Sears and that is I believe because JBS is still listed.

JBS is rated Baa3 / BBB- as of 2/16/09
SBCKO is rated Ba2/BB- as of 1/22/09

I would think that exchange traded debt would swing in the other direction in "good times" and would be quicker to sell at a premium when outlook is upbeat due to the small par values and the ease of buying and selling.

Anyone who is out there looking at bonds and plotting yield curves may be well served to go to quantumonline.com and search for the parent company's stock ticker... then select "all related securities" and add in any issues that are purely debt (there will be preferred and derivative investments mixed in and you will have to take the tickers to your broker and punch them in to get current pricing to calculate yields)

If there is truly an opportunity to pick up an extra 3-4% in an corporate you are interested in, it may be worth it.

It is definitely worth the discussion also, of whether the particular debt instrument is the same as a bond, treated the same as other debt.

JBS is a Corp Backed Asset Trust.... The trust owns bonds from JC Penney which pay 7 5/8% and takes that interest and pays out 7% to certificate owners. You'd really need to review the prospectus to make sure you have the same safety as a bond. but to me, an extra 6% if and when it's out there is worth a little reading I think.

This is not an endorsement of JBS in any way, just like anything else I mention, if it sparks some interest, do some homework and let us all know what comes out of your homework if you're so inclined.

I do own a small position of JBS that I purchased in the same time frame as my SBCKO as a hedge of sorts against SBCKO. Surely we might lose one of these great institutions, but both aren't going out business ;).


Scott
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any idea why the pink sheet listing has evaporated on this bond and the 7.0% yield sbckp?
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I can't find any reason, but Scottrade is not able to find any info for ticker SBCKO or SBCKP. In my portfolio holdings screen, it has added an asterisk to SBCKO and a note at the bottom reads that it is unable to accept sell orders for this security.

I spoke with a gentlemen at scottrade, and he found a note that it was no longer trading as of today, but no additional information was listed which he thought was odd.

E*Trade also does not return any information for the ticker.

Quantumonline doesn't have any information on what has transpired.

Scott
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I knew it was illiquid....

The dividend is paid on thursday, perhaps that has something to do with it.

It seems like the common has been doing a bit of a short squeeze for the last few weeks with low volume, no news, price increases.

I wonder how the cds swapped out debt fits into the short squeeze scenario.

Hoping (perhaps in vain) for another volkswagen here myself.
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Just to add to your analysis Scott, (I just read it)

I got in at about five dollars per share on the sbckp and sbcko.

with an annual coupon of 1.75 on the SBCKP, and a discount rate of 25%, six years of dividend payments would mean you have exceeded your hurdle rate of 25% annual returns. WITHOUT ANY RESIDUAL VALUE or further payments.

in fact, three years of payments are better than a breakeven at $5.25

So when people tout inflation risk as a reason not to own long bonds, this is true, when you pay par.

at 20 cents on the dollar, inflation risk seems well accounted for.

I think it is extremely unlikely that these bonds will default, as the inventory value of sears holdings alone exceeds all long term obligations (leases and debt and pension obligations) of sears holdings.

would Lampert rather sell off a hundred stores or so than default on the debt and be forced into bankruptcy?

most likely.

time will tell, and risk is always more two sided than I think.
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Quantumonline has added the following note to sbcko.

* NOTE: This security has been delisted at the request of the issuer and is no longer trading
but to our knowledge is still paying distributions to holders.
The security may start trading on the Other OTC market but to date it has not (to our knowledge).


This seems odd that SHLD would request that the OTC stop trading this security. It also seems to be in conflict with the prospectus which states that SRAc will apply to have this security listed, but although there is the standard language not gauranteeing a secondarty market will develop, there doesn't seem to be any language stating the issuer can request the secondary market to stop trading the security.

Not too worried, as long as the coupon payments keep showing up, I plan on holding this one for a while.


Scott
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Just a bit of an update for those of you following at home with your Radio Orphan Annie decoder.

Sears announced surprise positive earnings just last week.

.38 EPS for the quarter compared to a (.53) loss in the quarter a year ago.

Things look pretty bright (considering) for Sears.

I haven't accumulated any, but in researching by using the CUSIP (812404507) for SBCKO on investinginbonds.com, there are still blocks of this one trading. They are no longer trading as a stock, it seems they are trading through someone's bonds desk although I haven't been able to see any actively listed through E*Trade the few times I've looked.

It's trading between $7.5 and $8. Up substantially from the price that is frozen in my scottrade account based upon it's last trade on the OTC of $6.22.

With this recent earnings surprise, I am surprised to not see it trading even higher.

Scott
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