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Minyan Mailbag: Nothing New With Sears


Value is value whether it is monetized or not.

Prof. Succo-

I would love to know your thoughts on
Business Week's article on Sears (SHLD) intellectual property and bond article.

Minyan Michael

Minyan Michael,

This is a prime example of why Minyanville exists: to debunk the marketing machine called Wall Street.

This article covers no new ground, but makes it sound as if it does.

The claim is that Sears, through ingenious financial engineering is somehow unlocking value in the company that no other structure has been able to do. But just remember: value is value whether it is monetized or not. But this structure even fails at that. The company is simply transferring ownership of brand names it owns into a separate entity that it wholly owns. But the company is merely issuing bonds (debt) against this collateral. Perhaps it makes that debt a "little" cheaper for the company, but it is certainly not unlocking some hidden value.

And the structure is nothing new. Pharmaceutical companies have for years set up ownership of patented drugs offshore in separate entities in order to avoid tax liability. Sears is simply taking the same premise to raise debt.

People must understand that all financial engineering really does is hide pockets of debt in either off balance sheet structures or contingent liabilities. It is a way that has allowed the U.S. economy to develop in a very levered fashion. It has allowed people to believe that their balance sheets are in great shape, but that is merely a reflection of high nominal asset prices and extremely low rates for money. It has only created a massive amount of compression because, at some point, no matter what the engineering behind it, any economic entity must produce the income necessary to support that debt. Financial engineering has pushed back the pressures rising to service that debt, but it has not eliminated them and will only make the eventual unwind worse when it happens.

We are seeing signs of this now in the worst pockets of debt in the U.S. economy. These pressures will continue to build and spill over into other areas.

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