Sears 2006 Annual Report Download - page 75

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SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
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 and January 28, 2006, there were $686 million and $366 million
of letters of credit outstanding, respectively, 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 and $368 million posted as collateral under the LC Agreement as of
February 3, 2007 and January 28, 2006, respectively. 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.
The Company also posts cash collateral for certain self-insurance programs. The Company continues to
classify the cash collateral posted for self-insurance programs as cash and cash equivalents due to the Company’s
ability to substitute letters of credit for the cash at any time at its discretion. As of February 3, 2007 and
January 28, 2006, $32 million and $98 million of cash, respectively, was posted as collateral for self-insurance
programs.
Orchard Supply Hardware LLC (“LLC”) Credit Agreement
In November 2005, LLC entered into a five-year, $130 million senior secured revolving credit facility (the
“LLC Facility”), which includes a $25 million letter of credit sublimit. The LLC Facility is available for LLC’s
general corporate purposes and is secured by a first lien on substantially all of LLC’s non-real estate assets.
Availability under the LLC Facility is determined pursuant to a borrowing base formula based on inventory and
accounts and credit card accounts receivable, subject to certain limitations. As of February 3, 2007, $36 million
was outstanding under the LLC Facility consisting of $34 million in borrowings and $2 million in outstanding
letters of credit. As of January 28, 2006, $61 million was outstanding under the LLC Facility consisting of
$56 million in borrowings and $5 million in outstanding letters of credit.
Convertible Notes
At the time of Kmart’s emergence from bankruptcy, ESL Investments, Inc. (“ESL”), through its affiliates,
was issued $60 million principal of 9% convertible notes (the “Notes”) which were convertible to equity at a
price equal to $10 per share at the option of the holder at any time prior to May 2006. On January 31, 2005, ESL
affiliates converted, in accordance with their terms, the outstanding Notes and six months of accrued interest into
an aggregate of 6.3 million shares of Kmart common stock. In consideration of the conversion of these Notes
prior to maturity, ESL and its affiliates received a $3 million payment from Kmart. The cash payment was
equivalent to the approximate discounted after-tax cost of the future interest payments that would have otherwise
been paid by Kmart to ESL affiliates in the absence of the early conversion. In conjunction with the conversion,
the Company recognized the remaining related unamortized debt discount of $17 million as interest expense.
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