Sears 2007 Annual Report Download - page 44

In fiscal 2005, the Finance Committee of our Board of Directors authorized the repurchase, subject to
market conditions and other factors, of up to $500 million of our outstanding indebtedness and our subsidiaries in
open market or privately negotiated transactions. The source of funds for the purchases is our cash from
operations or borrowings under the Credit Agreement. Our wholly-owned finance subsidiary, Sears Roebuck
Acceptance Corp. (“SRAC”), has repurchased $160 million of its outstanding notes, including $2 million
repurchased during each of fiscal 2007 and fiscal 2006, thereby reducing the unused balance of this authorization
to $340 million.
On January 31, 2005, Kmart entered into an agreement with Holdings and certain affiliates of
ESL Investments, Inc. (“ESL”). Pursuant to this agreement, ESL affiliates converted, in accordance with their
terms, all of the outstanding 9% convertible subordinated notes of Kmart and six months of accrued interest into
an aggregate of 6.3 million shares of Kmart common stock. In consideration of ESL’s conversion of the notes
prior to maturity, ESL 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 and its affiliates in the absence of the early conversion. In conjunction with the conversion, we
recognized the remaining related unamortized debt discount of $17 million as interest expense.
During fiscal 2005, we terminated interest rate swaps with a notional value of approximately $1.0 billion
that had converted certain of our fixed-rate debt to floating-rate debt. We 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. We had no interest rate swaps outstanding at
February 2, 2008.
Debt Ratings
The ratings of our domestic debt securities as of February 2, 2008 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-2 B
Credit Agreement
We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a funding source for
general corporate purposes, which includes a $1.5 billion letter of credit sublimit. The Credit Agreement, which has
an expiration date of March 2010, is a revolving credit facility under which SRAC and Kmart Corporation are the
borrowers. The Credit Agreement is guaranteed by Holdings and certain of our direct and indirect subsidiaries and
is secured by a first lien on our 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 levels, subject to certain limitations. As of February 2, 2008, we had $974 million of letters of credit
outstanding under the Credit Agreement with $3.0 billion of availability remaining under the Credit Agreement.
During fiscal 2007, maximum direct borrowings outstanding under the Credit Agreement were $675 million, which
were repaid before the fiscal year end. 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
We also have 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 next up for
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