Sears stock plummets as its CEO offers a $400 million loan

Sears Holdings Co. stock fell by 9.4 percent on Tuesday following news that its chairman and CEO will be providing the company with a $400 million loan.

Shares sank to a 52-week low down to $30.37 at the end of the trading day, which is a huge drop from its 52-week high of $67.50.

Sears announced on Monday that the company would be receiving a $400 million loan from a hedge fund owned by Eddie Lampert’s, the CEO and chairman of Sears.

The loan is guaranteed by a first lien on 25 properties that Sears owns. The loan has a base interest rate of 5 percent.

Update October 23, 2014: Investment website Seeking Alpha reports that Sears is closing down more than 100 stores and laying off nearly 6,000 employees by Christmas.

The reason why the company decided to use its real estate as collateral is thought to be because of its recent drop in inventory – which occurred after numerous store closures.

The company has expressed an interest in selling off its Sears Auto Centers as well as its stake in Sears Canada. This sudden cash infusion suggests that the company is struggling to find decent offers.

A spokesman for Sears, Howard Riefs, stated that the loan is a more predictable source of funding at the moment because of uncertainty regarding the transactions of Sears Canada and its auto centers.

Riefs said:

“Moreover, we want to be proactive in demonstrating to our vendors and other constituents that we will continue to generate liquidity needed to invest in our business and meet all of our financial obligations.”

“While we are working to transform our business, with a goal of achieving a longer term and more flexible capital structure that allows us to accelerate our transformation, we want to ensure that current operations are sufficiently funded.”

Why is Sears seeking so much cash?

The company set a target to raise $1 billion this year to help transform its business model – Sears is aiming to turn the company into a member-driven shopping service.

It managed to raise $500 million from its spin off of Land’s End and a further $165 million from closing stores.

This could explain why they needed the sudden cash infusion by its own CEO.

Investor reactions

On Tuesday S&P Capital IQ stated that its revenue forecast for Sears dropped by 4.4 percent for the year and it increased the loss per share estimate up to $8.97 (from $1.45).

There is skepticism about the long-term prospects of the company after years of poor financial results and the fact its been selling off assets to make up for the losses.