Sears 2011 Annual Report Download - page 42

the applicable base rate plus 3.0% under the Original Domestic Credit Agreement. Commitment fees have also
been reduced to a range of 0.375% to 0.625% based on usage from the previous range of 0.75% to 1.00%.
The Amended Domestic Credit Agreement continues to include a $1.5 billion letter of credit sub-limit and
an uncommitted accordion feature that provides us the flexibility, subject to certain terms and conditions, to use
the existing collateral under the credit facility to obtain an aggregate amount of up to $1.0 billion in additional
borrowing capacity if we so choose. The Amended Domestic Credit Agreement permits aggregate second lien
indebtedness of up to $2.0 billion, of which $1.24 billion second lien notes were outstanding at January 28, 2012,
providing the Company the capacity to issue up to an additional $760 million in second lien indebtedness. The
Amended Domestic Credit Agreement is in place as a funding source for general corporate purposes and is an
asset-based revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart
Corporation are the borrowers. The Amended Domestic Credit Agreement is secured by a first lien on most of
our domestic inventory and credit card and pharmacy receivables, and is subject to a borrowing base formula to
determine availability.
The Amended Domestic Credit Agreement limits our ability to make restricted payments, including
dividends and share repurchases, if availability under the credit facility, as defined, is less than 15%. It also
imposes various other requirements, which take effect if availability falls below designated thresholds, including
a cash dominion requirement and a requirement that the fixed charge ratio at the last day of any quarter be not
less than 1.0 to 1.0. Based on availability, none of these requirements were in effect at January 28, 2012.
At January 28, 2012, we had $838 million of borrowings and $626 million of letters of credit outstanding
under the Amended Domestic Credit Agreement. As a result, our availability under the agreement was $1.8
billion at January 28, 2012. The majority of the letters of credit outstanding are used to provide collateral for our
insurance programs.
Senior Secured Notes
In October 2010, we sold $1 billion aggregate principal amount of senior secured notes (the “Notes”), which
bear interest at 6 5/8% per annum and mature on October 15, 2018. Concurrent with the closing of the sale of the
Notes, the Company sold $250 million aggregate principal amount of Notes to the Company’s domestic pension
plan in a private placement. The Notes are guaranteed by certain subsidiaries of the Company and are secured by
a security interest in certain assets consisting primarily of domestic inventory and credit card receivables (the
“Collateral”). The lien that secures the Notes is junior in priority to the lien on such assets that secures
obligations under the Amended Domestic Credit Agreement, as well as certain other first priority lien
obligations. The Company used the net proceeds of this offering to repay borrowings outstanding under the
Original Domestic Credit Agreement on the settlement date and to fund the working capital requirements of our
retail businesses, capital expenditures and for general corporate purposes. The indenture under which the Notes
were issued contains restrictive covenants that, among other things, (1) limit the ability of the Company and
certain of its domestic subsidiaries to create liens and enter into sale and leaseback transactions and (2) limit the
ability of the Company to consolidate with or merge into, or sell other than for cash or lease all or substantially
all of its assets to, another person. The indenture also provides for certain events of default, which, if any were to
occur, would permit or require the principal and accrued and unpaid interest on all the then outstanding notes to
be due and payable immediately. Generally, the Company is required to offer to repurchase all outstanding Notes
at a purchase price equal to 101% of the principal amount if the borrowing base (as calculated pursuant to the
indenture) falls below the principal value of the notes plus any other indebtedness for borrowed money that is
secured by liens on the Collateral for two consecutive quarters or upon the occurrence of certain change of
control triggering events. The Company may call the Notes at a premium based on the “Treasury Rate” as
defined in the indenture, plus 50 basis points. On September 6, 2011, we completed our offer to exchange the
Notes held by nonaffiliates for a new issue of substantially identical notes registered under the Securities Act of
1933, as amended.
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