Sears Is About to Take Its Last Gasp; Here's How You'll Profit

Shah Gilani

Unless there really is a Santa Claus, Sears Holdings Corp. (Nasdaq: SHLD) is going to seek bankruptcy protection.

It's only a matter of time. And that time is running out, quickly.

Billionaire hedgie Eddie Lampert, who besides running his namesake ESL Investments fund also runs Sears Holdings as its chairman and CEO, just put another $200 million into Sears last month.

That brings his fund's helping hand, I mean handout, to a tad more than $2 billion!

Poor Sears was once the Amazon of its day. Now it's not only a dinosaur, it's already dead.

We're going to do a little grave dancing before the obituary arrives.

Here's how much of a mess SHLD already is and how you can profit from its extinction…

Hell Will Break Loose Any Day Now

To be clear, that ESL $200 million went to Sears USA, not Sears Canada.

You know Sears Canada, don't you? The Canadian unit of Sears was spun out of Sears Holdings back in 2014 in a financial engineering move that, presumably, attempted to save both units' lives.

That didn't work out so well. Sears Canada declared bankruptcy this past summer. It has until Nov. 7 to get itself out from under the protective blanket covering it, and then all hell breaks loose.

Sears Canada's CEO recently split from the company to assemble an investor group (hopefully with some private equity swashbucklers) to make a bid to buy the company out of bankruptcy.

So far, with the clock ticking, they've got nothing. In fact, the race is practically over and there's no deal.

Creditors want to immediately close and liquidate 11 stores in Canada to get paid what they're owed. Taking those 11 stores down kills the former CEO's chances.

ESL owns 45% of Sears Canada… but it's even worse than it sounds. Eddie Lampert-controlled entities own close to half of Sears Holdings' equity (what's left after Sears Canada was spun out) and hold more than $1.7 billion of Sears' debt.

But Eddie's no fool; the money he's lending Sears is backed by real estate. The last $200 million, besides being collateralized by more of what's left of Sears' real estate, also came with an interest rate tag of 11%, which triggers higher in a default.

As if Sears Holdings isn't leveraged enough, it owns 12% of Sears Canada.

The reason Lampert had to pony up another $200 million last month is that it's coming on Christmas, and even before Sears gets there and tries to sell its way back to life, vendors are jumping ship.

Some have just stopped selling to Sears, but most of the rest are demanding they get paid a lot sooner than the typical 90 days that Sears enjoyed years ago. A lot of vendors are demanding 30 days, and some want 15 days. Increasingly, they're demanding cash, hence the latest $200 million cash infusion.

Vendors are being charged as much as 4% a month in insurance (in the case that they don't get paid) on the merchandise they ship to Sears. It's killing the already thin margins of many Sears' vendors.

Soon, there'll be nothing left to sell at all.

Shah Gilani

About the Author

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Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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