Sears 2012 Annual Report Download - page 74

SEARS HOLDINGS CORPORATION
Notes to Consolidated Financial Statements—(Continued)
74
January 28, 2012. The current availability may be reduced by reserves currently estimated by the Company to be
approximately $300 million, which may be applied by the lenders at their discretion pursuant to the Credit Facility
agreement. As a result of judicial developments relating to the priorities of pension liability relative to certain
secured obligations, Sears Canada has executed an amendment to the Sears Canada Credit Facility which would
provide additional security to lenders, with respect to the Company's unfunded pension liability by pledging certain
real estate assets as collateral thereby partially reducing the potential reserve amounts by up to $150 million the
lenders could apply. The potential additional reserve amount may increase or decrease in the future based on
estimated net pension liabilities.
Letters of Credit Facility
Effective March 15, 2013, we agreed to terminate our $500 million uncommitted letter of credit facility dated
January 20, 2011 with Wells Fargo Bank, National Association ("Wells Fargo") in advance of the scheduled
termination date of January 20, 2014, as no letters of credit have been issued and outstanding under the facility since
May 2011. The facility was secured by a first priority lien on cash placed on deposit at Wells Fargo in an amount
equal to 103% of the face value of all issued and outstanding letters of credit.
Cash Collateral
We post cash collateral for certain self-insurance programs. We continue to classify the cash collateral posted
for self-insurance programs as cash and cash equivalents due to our ability to substitute letters of credit for the cash
at any time at our discretion. At February 2, 2013 and January 28, 2012, $19 million and $20 million of cash,
respectively, was posted as collateral for self-insurance programs.
Wholly owned Insurance Subsidiary and Intercompany Securities
We have numerous types of insurable risks, including workers’ compensation, product and general liability,
automobile, warranty, asbestos and environmental claims and the extended service contracts we sell to our
customers. In addition, we provide credit insurance to third party creditors of the Company to mitigate their credit
risk with the Company. The associated risks are managed through Holdings’ wholly owned insurance subsidiary,
Sears Reinsurance Company Ltd. (“Sears Re”), a Bermuda Class 3 insurer.
In accordance with applicable insurance regulations, Sears Re holds marketable securities to support the
insurance coverage it provides. Sears utilizes two securitization structures to issue specific securities in which Sears
Re invests its capital to fund its insurance obligations. In November 2003, Sears formed a Real Estate Mortgage
Investment Conduit, or REMIC. The real estate associated with 125 Full-line stores was contributed to indirect
wholly owned subsidiaries of Sears, and then leased back to Sears. The contributed stores were mortgaged and the
REMIC issued securities that are secured by the mortgages and collateral assignments of the store leases. Sears Re
and two other indirect wholly owned subsidiaries of Holdings own $1.3 billion (par value) of these mortgage-backed
securities. Payments to Sears Re on these securities are funded by the lease payments. In May 2006, a subsidiary of
Holdings contributed the rights to use the Kenmore, Craftsman and DieHard trademarks in the U.S. and its
possessions and territories to KCD IP, LLC, an indirect wholly owned subsidiary of Holdings. KCD IP, LLC has
licensed the use of the trademarks to subsidiaries of Holdings, including Sears and Kmart. Asset-backed securities
with a par value of $1.8 billion were issued by KCD IP, LLC and subsequently purchased by Sears Re, the collateral
for which includes the trademark rights and royalty income. Payments to Sears Re on these asset-backed securities
are funded by the royalty payments. The issuers of these mortgage-backed and asset-backed securities and the
owners of these real estate and trademark assets are bankruptcy remote, special purpose entities that are indirect
wholly owned subsidiaries of Holdings. Cash flows received from rental streams and licensing fee streams paid by
Sears, Kmart, other affiliates and third parties, are used for the payment of fees and interest on these securities. Since
the inception of the REMIC and KCD IP, LLC, these mortgage-backed and asset-backed securities have been
entirely held by our wholly owned consolidated subsidiaries in support of our insurance activities. At February 2,
2013 and January 28, 2012, the net book value of the securitized trademark rights was approximately $1.0 billion.
The net book value of the securitized real estate assets was approximately $0.8 billion at February 2, 2013 and
January 28, 2012.