Edward Lampert the hedge fund manager appears to have done a good job negotiating with Edward Lampert the Sears Holdings Corp. chairman.
The manager of Bay Harbor, Florida–based hedge fund firm ESL Investments agreed to lend $400 million to Sears, the struggling cash-strapped retailer whose largest shareholders are ESL and Lampert.
Under the terms, the loan — which matures on December 31 — will have an annual interest rate of 5 percent. Sears will also pay an up-front fee of 1.75 percent of principal. The loan can be extended an additional two months for an additional 0.5 percent fee. Sears is guaranteeing the loan, which is secured by a first-priority lien on 25 properties owned by the retailer.
These are pretty good terms for ESL in this interest rate environment. For example, the SPDR Barclays Short Term High Yield Bond ETF is now yielding 5.25 percent. The current yield to maturity on the Bloomberg Global High Yield Corporate Bond Index — which comprises bonds with an average life of a little less than five years — is 5.88 percent. The Fidelity Floating Rate High Income mutual fund, which buys bank loans whose interest rates reset every 30 to 90 days, now yields 2.5 percent.
The Sears loan may turn out to be one of ESL’s best investments of the year. As of today, the hedge fund’s portfolio of five stocks — valued at roughly $2.3 billion as of June 30 — is down about 7 percent, according to Alpha’s calculations.
Sears Holdings, which accounts for roughly $1 billion of ESL’s equity assets, is down nearly 40 percent year to date, while spin-off Sears Hometown and Outlet Stores, which was worth $124 million as of June 30, is off about 32 percent.
This is somewhat offset by another Sears spin-off, Lands’ End. Since it began trading in early April, the stock has surged more than 50 percent from its opening price.
Otherwise, longtime holding AutoNation, which ESL and Lampert have been consistently paring over the past few years, is up just 4 percent this year, while ESL’s $116 million investment in Gap is up 13 percent.
It is not clear how all of ESL’s investments have fared, however. For example, according to a separate regulatory filing, ESL had a total of $4.2 billion under management at the end of 2013. This was much more than the $2.5 billion disclosed in its year-end 13F, which includes only U.S.-listed equities. Presumably, part of the difference in the two figures is Lampert’s own capital in the hedge fund.
However, the Sears and AutoNation holdings in the 13F do not include Lampert’s personal shares.
In any case, the 5 percent annualized gain from the Sears loan on $400 million of that nonequity assets should help offset some of the current losses in the stock portfolio, mostly due to declines in Sears itself and Sears Hometown and Outlet Stores.
