Sears 2007 Annual Report Download - page 45

renewal in July 2008. 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. Under
the terms of the LC Agreement, we have 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 us
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 we elect to post cash collateral, we must maintain cash in an amount
equal to 100.5% of the face value of letters of credit outstanding. As of February 2, 2008, there were
$741 million of letters of credit outstanding under the LC Agreement, which were collateralized by letters of
credit issued under the $4.0 billion Credit Agreement. We did not have any cash posted as collateral under the
LC Agreement as of February 2, 2008.
Cash Collateral
We also post cash collateral for certain self-insurance programs which we continue to classify as cash and
cash equivalents due to our ability to substitute letters of credit for the cash at any time at our discretion. As of
February 2, 2008, we had $29 million posted as collateral for self-insurance programs.
Orchard Supply Hardware LLC (“LLC”) Credit Agreement
In fiscal 2005, OSH LLC entered into a five-year, $130 million senior secured revolving credit facility (the
“OSH LLC Facility”), which includes a $25 million letter of credit sublimit. The OSH LLC Facility is available
for OSH LLC’s general corporate purposes and is secured by a first lien on substantially all of OSH LLC’s
non-real estate assets. Availability under the OSH 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 2, 2008, there were $17 million in borrowings outstanding under the OSH LLC Facility and $1 million
in outstanding letters of credit. The $17 million in borrowings have been classified within short-term borrowings
on our consolidated balance sheet as of February 2, 2008, as we intend to repay the entire outstanding amount of
this borrowing within the next 12 months.
Wholly-owned Insurance Subsidiary and Inter-company Notes
As noted in Note 1 of Notes to Consolidated Financial Statements, we have numerous types of insurable risks,
including workers’ compensation, product and general liability, automobile, warranty, and asbestos and environmental
claims. Also, as discussed in Note 1, we sell extended service contracts to our customers. The associated risks are
managed through our wholly-owned insurance subsidiary. In accordance with applicable insurance regulations, the
insurance subsidiary holds investment grade securities to support the insurance coverage it provides.
We have transferred certain domestic real estate and intellectual property (i.e. trademarks) into separate
wholly-owned, bankruptcy remote subsidiaries. These bankruptcy remote subsidiaries lease the real estate
property to Sears and license the use of the trademarks to Sears and Kmart. Further, the bankruptcy remote
subsidiaries have issued asset-backed notes that are collateralized by the aforementioned real estate rental
streams and intellectual property licensing fee streams. Cash flows received from rental streams and licensing fee
streams paid by Sears, Kmart and, potentially in the future, other affiliates or third parties will be used for the
payment of fees, interest and principal on the asset-backed notes issued. Since the inception of these subsidiaries,
the debt securities have been entirely held by our wholly-owned consolidated subsidiaries in support of our
insurance activities. The net book value of the securitized real estate assets was approximately $1.0 billion and
$1.0 billion at February 2, 2008 and February 3, 2007, respectively. The net book value of the securitized
intellectual property assets was approximately $1.0 billion and $1.0 billion at February 2, 2008 and February 3,
2007, respectively.
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