Moody's Downgrades Sears

Moody's Investors Service lowered Sears Holdings Corp. Corporate Family Rating from Ba2 to Ba3, with a ratings outlook that is negative. This downgrade concluded the review for a possible downgrade that commenced on May 11, 2011. Moody's noted the downgraded rating reflects persistent declines in consolidated revenues over the past few years as well as pressure on operating margins resulted from erosion in market share. Credit metrics have weakened and are expected to remain weak for an extended period. Moody's expects Sears to reduce funded debt over the next 12 to 18 months as it redeems maturing long term debt and continues to make meaningful contributions to its domestic pension plans. The sharp declines in appliance sales in recent quarters reflect timing of stimulus plans in the last year, and Moody's expects appliance sales to gradually recover toward more normalized replacement demand, though weak conditions in the US housing market will remain a drag for sales of higher ticket items like appliances. The rating outlook could be stabilized if operating earnings begin to stabilize and debt/EBITDA is expected to be sustained below 5 times and interest coverage (EBITA/interest) approached 1.5 times.

In view of the persistence of Sears' operating challenges, ratings are unlikely to be upgraded over the near term. Over time ratings could be upgraded if the company demonstrated sustained recovery in sales and operating earnings while also sustaining debt/EBITDA below 4.5 times and interest coverage approached 2.0 times. Ratings could be downgraded further if the company's operating earnings continue to erode over the next few quarters. Quantitatively ratings could be lowered if interest coverage remains near 1.0 times or if debt/EBITDA is expected to be sustained above 5 times.