Sears 2014 Annual Report Download - page 9

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While the Company's domestic revolving credit facility currently provides for up to $3.275 billion of lender
commitments, our ability to borrow funds under this facility is limited by a borrowing base determined relative to
the value, from time to time, of eligible inventory, accounts receivable and certain other assets. In addition, our
ability to incur possible second lien indebtedness that is otherwise permitted under the domestic revolving credit
facility is limited by a borrowing base requirement under the indenture that governs our senior secured notes due
2018. If, through asset sales or other means, the value of these eligible assets is not sufficient to support borrowings
of up to the full amount of the commitments under this facility, we will not have full access to the facility, but rather
could have access to a lesser amount determined by the borrowing base. Such a decline in the value of eligible assets
also could result in our inability to borrow up to the full amount of second lien indebtedness permitted by the
domestic credit facility, but rather we could be limited to borrowing a lesser amount determined by the borrowing
base as calculated pursuant to the terms of the indenture. The domestic revolving credit facility imposes various
other requirements, which take effect if availability falls below designated thresholds, including a cash dominion
requirement. The domestic credit facility also effectively limits full access to the facility if our fixed charge ratio at
the last day of any quarter is less than 1.0 to 1.0. As of January 31, 2015, our fixed charge ratio was less than 1.0 to
1.0. If availability under the domestic revolving credit facility were to fall below 10%, the Company would be
required to test the fixed charge coverage ratio, and would not comply with the facility, and the lenders under the
facility could demand immediate payment in full of all amounts outstanding and terminate their obligations under
the facility.
The lenders under our credit facilities may not be able to meet their commitments if they experience shortages
of capital and liquidity and there can be no assurance that our ability to otherwise access the credit markets will not
be adversely affected by changes in the financial markets and the global economy.
We cannot predict whether our plans to enhance our financial flexibility and liquidity to fund our
transformation will be successful.
We are continuing to pursue a transformation strategy and to explore potential initiatives to enhance our
financial flexibility and liquidity. We are exploring the formation of a Real Estate Investment Trust ("REIT"). We
currently expect proceeds in excess of $2.0 billion from the REIT transaction. We have incurred losses and
experienced negative operating cash flows for the past several years, and accordingly we have taken a number of
actions to enhance our financial flexibility and fund our continued transformation, including the senior secured term
loan facility due 2018, the separation of our Lands' End subsidiary, the secured short-term loan, the Sears Canada
rights offering, the rights offering for senior unsecured notes with warrants and real estate transactions. The
achievement of our objectives and outcome of our initiatives are subject to risks and uncertainties with respect to
market conditions and other factors that may cause our actual results, performance or achievements to be materially
different from our plans, and there can be no assurance that transactions to monetize assets or other actions to
generate liquidity will become available on terms that are acceptable to us, on intended timetables or at all. In
addition, there can be no assurance that the evaluation and/or completion of any potential transactions will not have
a negative impact on our other businesses.
We cannot predict the outcome of the actions to generate liquidity to fund our transformation, whether such
actions would generate the expected liquidity to fund the transformation as currently planned or whether the costs of
such actions or costs of this or future financings would more than offset any improvements to our earnings and
liquidity resulting from our transformation initiatives. If we continue to experience operating losses, and we are not
able to generate enough funds from the above actions (or some combination of other actions), the availability under
our domestic revolving credit facility might be fully utilized, in particular during our peak borrowing period, and we
would need to secure additional sources of funds.
Potential liabilities in connection with the separation of Lands' End may arise under fraudulent conveyance
and transfer laws and legal capital requirements.
With respect to the separation of our Lands' End, Inc. subsidiary through a pro rata distribution to our
stockholders (the "LE Spin-off"), if either Holdings or Lands' End subsequently fails to pay its creditors or enters
insolvency proceedings, the transaction may be challenged under U.S. federal, U.S. state and foreign fraudulent
conveyance and transfer laws, as well as legal capital requirements governing distributions and similar transactions.
If a court were to determine under these laws that, (a) at the time of the LE Spin-off, the entity in question: (1) was