http://www.sec.gov/Archives/edgar/data/1310067/000131006714000031/form8-kseptember152014.htm1. Way short-term.
"The Loan is scheduled to mature on December 31, 2014, but as long as there is no event of default, the maturity date can be extended to February 28, 2015 at the discretion of the Company upon the payment of an extension fee equal to .5% of the principal amount. The Loan will have an annual base interest rate of 5%. The Borrowers are required to pay an upfront fee of 1.75% of the full principal amount."
2. Eddie gets to pick some properties if default happens:
"The Loan is guaranteed by the Company and is secured by a first priority lien on 25 real properties owned by the Borrowers. In certain circumstances, the Lender may exercise its reasonable determination to substitute one or more of the properties with substitute properties. The Loan includes customary representations and covenants, including with respect to the condition and maintenance of the real property collateral."
Hey Eddie, what happened to that "turnaround plan"? Not exactly a vote of confidence.
I'm also a little skeptical of a CEO's ability to use his own financial vehicles to loan his company money that is secured by company property. It may be legal, but it doesn't look very good.
Did no one else want to loan the company money (any chance to participate given to Fairholme, who is by far the second largest shareholder with 23% vs 3rd largest at about 5.5%?), or did Eddie see a chance to strip some real estate out for his own funds if things go South? Or both?
Comments
We've had threads regarding Sears before relating to their troubles. They have been at the edge for a long time. I keep hearing they have value in their real estate. Why don't they use it then?
I've repeatedly said that I don't see the wildly enthusiastic value case (I think there is value there, but it depends on a number of factors and is by no means the sure thing that some are acting like) and that Sears doesn't have an eternity - every day that goes by, the assets are a little less valuable as the company becomes a little more irrelevant due to management that has - despite their discussions to the contrary - has only been concerned with financial engineering and not actually trying to turn the company around.
Berkowitz acknowledges that some people complain that Sears stores are rundown, but he explains, “Sears does just enough, so they're not breaking the terms of their very long lease.” (http://www.investmentnews.com/article/20120918/blog06/120919939/why-bruce-berkowitzs-bullish-stance-on-aig-is-paying-off#)
Now we're at the point where the CEO of the company is loaning the company money (and setting himself up to get company owned real estate if default happens), either from the standpoint of there wasn't anyone else willing or because he sees an opportunity to grab some choice properties for himself. Either way, I think someone's going to try to make the case that Sears was acting improperly in this case in terms of fiduciary responsibility to shareholders (and if they are acting properly from the standpoint of this loan was a last resort because no one else wanted to loan the co money, what does that say?) The short-term nature of the loan makes me believe this was needed to just get through the holidays.
I do think that you're getting real close to the point where either the grand plan is revealed or the worst case where the company is picked apart by distressed (Oaktree, Blackstone, etc etc etc) investors.
Seems to be a lot of discrepancies (at least at M*) over how much Fairholme owns of Sears and 'when' they actually bought it. M* shows Fairholme (and I assume they mean the fund) owns 13.35% and that it was a recent purchase. Total holding in FAIRX equates to 6.97% of assets. That I'm most definitely confused about unless Mr. Berkowitz flips his position with changes in the wind direction. M* also shows Fairholme Allocation as holding 0.83%.
Top Institutional Shareholders:
Fairholme Capital Management 24,672,823 23.17% 985,926,007 Jun 30, 2014
If my math is correct, that means about 100M shares of SHLD are down $3.17 which equates to a loss of $317M of shareholder value in one day.
So much for the $400M loan Eddy, the market just swallowed over 317M of it on the news of your deal.
It's looking like shareholders are turning into sharefolders on your lead.
Additionally, what happened today is - I think - an alert about the state of the business.
You do have assets of value here - and Lampert has lined himself up to get 25 of the ones of his choice if things go South. Given that, I think some people are abandoning the value case because on one side, you have valuable assets and on the other a business that no one but the CEO would loan to. Therefore, given the state of the business, how do you get to the value in a way that favors the shareholders and not bondholders and distressed investors who are going to come in and pick over the assets.
Given the state the business is in, I think the idea of how you get from point A to point B in this case has never been entirely clear and when you have the CEO effectively lining himself up to potentially get the choicest assets, people are bailing because they don't see how the shareholders benefit, but they see the CEO certainly is. The whole thing with Lampert looks kinda like he's bailing with the best assets first, while he can.
My view: Sears in its current state is no longer by end of next year - either Lampert has pulled something off or bondholders are first in line.
Bruce Berkowitz seems to me to be a big risk taker. All his talk about "rule number one is don't lose money, Rule number two is the same as rule number one".....could be just TALK. He owns a lot of Sears, and has 49% of his money in AIG. St. Joe is a risky stock. Fannie Mae and Freddie Mack may turn out to be home runs, but Congress also may put them completely out of business. Berkowitz is a Big Risk Taker. Not a "don't lose money" kind of guy. The "walk" is very different than the "talk". What's up with that?
We shall see.
I owned it for more than 11 years, so I hear ya
Bruce Berkowitz used to be my favorite mutual fund manager, by far!
I felt he betrayed a bit of trust though after putting 50% of the fund in AIG, buying a lot of risky stocks like Sears, St. Joe, Fannie and Freddie when the very future of the latter two was less assured than it is even now, etc.
He's had a remarkable return since inception, and you've done great!!
He may yet receive future Morningstar Manager of the Year and Decade awards, we shall see
Question: What did you know about Bruce Berkowitz at the time of FAIRX inception, that made you invest in it?
I got in in 2003, when looking for Buffett type investing managers. Sold after I lost faith in the manager, mostly this year. I didn't sell as a prediction about his future performance. That is not predictable at all. And he may hit a home run with Fannie and Freddie, that would be my guess, although small chance of a strike out there too.
Side note...
Up at 0-dark-30 this morning.
Drove 5 hours from paradise (California central coast) through Cupertino, Palo Alto (Apple, Microsoft, eBay country) with all attendant traffic.
Enjoyed modern SFO airport Terminal 2.
Virgin America 3 hour flight to Chicago.
Took Blue Line from O'Hare into downtown Chicago for M* conference.
And my first glimpse of the city: Sears Tower.
Ha!
But alas, it is no longer. Today it is Willis Tower.
http://www.cnbc.com/id/102012186#.
Edited to add: ...and out come the lawyers, as I expected:
http://www.marketwatch.com/story/sears-shareholder-alert-andrews-springer-llc-is-investigating-sears-holding-corporation-for-possible-violations-of-securities-laws-2014-09-18
Jan 2014. Schwab waives the load. So far I am happy with the move. He does have a few concentrated bets, but nothing like AIG for FAIRX.
http://www.marketwatch.com/story/sears-shareholder-alert-andrews-springer-llc-is-investigating-sears-holding-corporation-for-possible-violations-of-securities-laws-2014-09-18
"ESL Investments, whose sole stockholder is Lampert, controls 24.8% of Sears' common stock. Lampert, individually, controls an additional 23.7% of Sears' common stock"
Sears (SHLD) has been a losing proposition for at least 10 years.
Ten years is plenty of time.
Think you can shop price anywhere on their merchandise..so now what Sears? Profitability is going where?
The deathwatch continues.
Here's an example:
http://seekingalpha.com/article/1842602-tracking-bruce-berkowitzs-fairholme-portfolio-q3-2013-update
" The original stake was established in 2007 although the position size has fluctuated over the years. Last two quarters saw a combined stake increase of ~10% at prices between $40 and $60. The pattern continued this quarter with a marginal stake increase at prices between $39.34 and $62. The current stock price of $63 is far below Berkowitz's average purchase price. "
That was from Fairholme's 13f almost a year ago.
WSJ take
http://online.wsj.com/news/articles/SB10001424052702303643304579109023202738550
Barrons take
http://online.barrons.com/news/articles/SB50001424053111903891504579121603785394482