Sears 2006 Annual Report Download - page 45

During fiscal 2005, the Company terminated interest rate swaps with a notional value of approximately
$1.0 billion that had converted certain of the Company’s fixed-rate debt to floating-rate debt. The Company
received $60 million in cash proceeds from the swap terminations, representing the aggregate fair value of these
swaps as of the termination date. As the hedges related to these swaps qualified for hedge accounting, an
offsetting adjustment was recorded to the carrying amount of the designated hedged debt, which remains
outstanding, and this adjustment will be amortized into interest expense over the remaining term of the debt. The
Company had no interest-rate swaps outstanding at February 3, 2007.
Debt Ratings
The ratings of the Company’s domestic debt securities as of February 3, 2007 appear in the table below:
Moody’s
Investors
Service
Standard &
Poor’s
Ratings
Services
Fitch
Ratings
Unsecured long-term debt ................................. Ba2 BB+ BB
Unsecured commercial paper ............................... NP B-1 B
Credit Agreement
The Credit Agreement, which expires March 2010, is available for general corporate purposes and includes
a $1.5 billion letter of credit sublimit. The Credit Agreement is a revolving credit facility under which SRAC and
Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of its direct
and indirect subsidiaries and is secured by a first lien on domestic inventory, credit card accounts receivable and
the proceeds thereof. Availability under the Credit Agreement is determined pursuant to a borrowing base
formula, based on domestic inventory, subject to certain limitations. As of February 3, 2007, the Company had
$196 million of letters of credit outstanding under the Credit Agreement with $3.8 billion of availability
remaining under the Credit Agreement. There were no direct borrowings under the facility during fiscal 2006.
The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances
based on material adverse changes or credit ratings.
Letter of Credit Agreement
The Company has a letter of credit agreement (the “LC Agreement”) with a commitment amount of up to
$1.0 billion. The LC Agreement, which is renewable annually upon agreement of the parties, is scheduled for
renewal in August 2007. As of February 3, 2007, there were $686 million of letters of credit outstanding under
the LC Agreement.
Cash Collateral
Under the terms of the LC Agreement, the Company has the ability to post cash, inventory or other letters of
credit, including letters of credit issued under the Credit Agreement, as collateral. However, the Credit
Agreement prohibits the Company from using inventory as collateral under the LC Agreement. The cash
collateral account is subject to a pledge and security agreement pursuant to which if the Company elects to post
cash collateral, it must maintain cash in an amount equal to 100.5% of the face value of letters of credit
outstanding. The Company had $690 million posted as collateral under the LC Agreement as of February 3,
2007. The Company continues to classify the cash collateral posted under the terms of the LC Agreement as cash
and cash equivalents due to the Company’s ability to substitute these letters of credit with letters of credit under
the Credit Agreement, which does not require cash collateral, and its ability to provide letters of credit under the
Credit Agreement as collateral. There are no provisions in the LC Agreement that would restrict issuances based
on credit ratings, but issuances could be restricted under certain circumstances based on a material adverse
change.
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