Sears 2014 Annual Report Download - page 51

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Senior Unsecured Notes
On October 20, 2014, the Company announced its board of directors had approved a rights offering allowing
its stockholders to purchase up to $625 million in aggregate principal amount of 8% senior unsecured notes due
2019 and warrants to purchase shares of its common stock. The subscription rights were distributed to all
stockholders of the Company as of October 30, 2014, the record date for this rights offering, and every stockholder
had the right to participate on the same terms in accordance with its pro rata ownership of the Company's common
stock, except that holders of the Company's restricted stock that was unvested as of the record date received cash
awards in lieu of subscription rights. This rights offering closed on November 18, 2014 and was oversubscribed.
Accordingly, on November 21, 2014, the Company issued $625 million aggregate original principal amount of
8% senior unsecured notes due 2019 (the "Senior Unsecured Notes") and received proceeds of $625 million which
were used for general corporate purposes. The Senior Unsecured Notes are the unsecured and unsubordinated
obligations of the Company and rank equal in right of payment with the existing and future unsecured and
unsubordinated indebtedness of the Company. The Senior Unsecured Notes bear interest at a rate of 8% per annum
and the Company will pay interest semi-annually on June 15 and December 15 of each year. The Senior Unsecured
Notes are not guaranteed.
We accounted for the Senior Unsecured Notes in accordance with accounting standards applicable to
distinguishing liabilities from equity and debt with conversion and other options. Accordingly, we allocated the
proceeds received for the Senior Unsecured Notes based on the relative fair values of the Senior Unsecured Notes
and warrants, which resulted in a discount to the notes of approximately $278 million. The fair value of the Senior
Unsecured Notes and warrants was estimated based on quoted market prices for the same issues using Level 1
measurements as defined in Note 5. The discount is being amortized over the life of the Senior Unsecured Notes
using the effective interest method with an effective interest rate of 11.55%. Approximately $5 million of the
discount was amortized during 2014, resulting in a remaining discount of approximately $273 million at January 31,
2015. The book value of the Senior Unsecured Notes net of the remaining discount was approximately $352 million
at January 31, 2015.
Debt Repurchase Authorization
In 2005, our Finance Committee of the Board of Directors authorized the repurchase, subject to market
conditions and other factors, of up to $500 million of our outstanding indebtedness in open market or privately
negotiated transactions. Our wholly owned finance subsidiary, SRAC, has repurchased $215 million of its
outstanding notes. In 2011, Sears Holdings repurchased $10 million of Senior Secured Notes, recognizing a gain of
$2 million. The unused balance of this authorization is $275 million.
Unsecured Commercial Paper
We borrow through the commercial paper markets. At January 31, 2015 and February 1, 2014, we had
outstanding commercial paper borrowings of $2 million and $9 million, respectively. ESL held none of our
commercial paper at January 31, 2015 or February 1, 2014, including any held by Edward S. Lampert. See Note 15
of Notes to Consolidated Financial Statements for further discussion of these borrowings.
Secured Short-Term Loan
On September 15, 2014, the Company, through Sears, Sears Development Co. and Kmart Corporation
("Borrowers"), entities wholly-owned and controlled, directly or indirectly by the Company, entered into a $400
million secured short-term loan (the "Loan'") with JPP II, LLC and JPP, LLC (together, the "Lender"), entities
affiliated with ESL. The first $200 million of the Loan was funded at the closing on September 15, 2014 and the
remaining $200 million was funded on September 30, 2014. Proceeds of the Loan were used for general corporate
purposes.
The Loan was originally scheduled to mature on December 31, 2014. As permitted by the Loan agreement, the
Company paid an extension fee equal to 0.5% of the principal amount to extend the maturity date to February 28,
2015. The Loan has an annual base interest rate of 5%. The Borrowers paid an upfront fee of 1.75% of the full
principal amount.