Sears had some of its debt downgraded to default status for the first time this week.
But the move that led to the downgrade wasn’t a missed loan payment. It was because it completed a refinancing of some of its debt that will save the company an estimated $60 million a year.
The financially struggling retailer announced Wednesday that it had exchanged nearly $500 million of its debt that had been due this year or next year for debt that will not be due as soon. It may also be able to repay some of the debt with stock at some point in the future.
As a result, credit rating agencies Fitch and Standard & Poor’s both downgraded the debt to default status. The debt had already been at the lowest level of junk bond status.
“We believe the transaction constitutes a distressed exchange,” said S&P’s downgrade note.
Fitch’s note said the lower payments do not change its forecast that Sears is going to burn through between $1.2 billion to $1.3 billion of cash this year.
Still Fitch did upgrade Sears’ long-term debt due to the better terms to repay some of its debt, though it is still deep into junk bond status.
S&P said it also intends to upgrade Sears’ corporate credit rating to reflect the improved timeline for repayment of the debt. Sears did not immediately issue a statement about the downgrades. But it also issued a statement saying it is pleased that the move will improve its financial position.
Exchanging the debt “will strengthen our financial footing as we continue to execute on our strategic transformation,” said CEO Eddie Lampert. “We remain resolutely committed to enhancing our liquidity and working aggressively to return the company to profitability.”
