The Sneaky Side of Sears

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Business Week examined a fascinating scheme at secretive Sears: Eddie Lampert found a way to separate the future of Kenmore, Craftsman and DieHard from the not necessarily so bright fate of Sears and Kmart. Read between the lines, and it is easy to see how these product brands could evolve, perhaps by licensing them for use on products sold elsewhere than Sears and Kmart. If the stores went bankrupt, the prized product brands would be off limits to creditors.

The story is based on this unassuming paragraph buried in Sears Holdings' March 2007 10-K filing:

"The Company has transferred certain domestic real estate and intellectual property (i.e. trademarks) into separate wholly-owned, bankruptcy remote subsidiaries. These bankruptcy remote subsidiaries lease the real estate property to Sears and license the use of the trademarks to Sears and Kmart. Further, the bankruptcy remote subsidiaries have issued asset-backed notes that are collateralized by the aforementioned real estate rental streams and intellectual property licensing fee streams. Cash flows received from rental streams and licensing fees streams paid by Sears, Kmart and, potentially in the future, other affiliates or third parties will be used for the payment of fees, interest and principal on the asset-backed notes issued. Since the inception of these subsidiaries, the debt securities have been entirely held by wholly-owned consolidated subsidiaries of the Company in support of the Company's insurance activities. The net book value of the securitized real estate assets was approximately $1.0 billion and $1.1 billion at February 3, 2007 and January 28, 2006, respectively. The net book value of the securitized intellectual property assets was approximately $1.0 billion and $0.0 billion at February 3, 2007 and January 28, 2006, respectively."
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