Italy Sells 9 Billion Euros of Bills as Borrowing Costs Plunge

December 28, 2011, 6:00 AM EST By Chiara Vasarri

Dec. 28 (Bloomberg) --Italy sold 9 billion euros ($11.8 billion) of six-month Treasury bills and borrowing costs plunged from the previous auction as the government passed measures aimed at trimming the euro region’s second-biggest debt.

The Rome-based Treasury sold the 179-day bills at a rate of 3.251 percent down from a 14-year-high of 6.504 percent at the last auction of similar maturity securities on Nov. 25. Demand was 1.7 times the amount on offer, compared with 1.47 times last month. The Italian Treasury also sold 1.7 billion euros of zero- coupon notes due 2013 at 4.853 percent

A “successful start to the week’s Italian supply schedule,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “Italy managed to get away the whole 9 billion allocation amount. Domestics are likely to have facilitated demand, given the excess liquidity currently floating around.”

Prime Minister Mario Monti secured final approval in Parliament last week for a sweeping budget plan aimed at raising revenue and boosting anemic economic growth as he tries to persuade investors Italy can tame the country’s 1.9 trillion- euro debt and avoid a bailout. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may deepen the country’s recession and until today had donw little to bring down borrowing costs.

Bonds Gain

Italian bonds pared earlier losses and advanced with the yield on the country’s 10-year debt falling 23 basis point to 6.76 percent, narrowing the difference with Germany to 483 basis points from 508 basis points yesterday. Italy had to pay the most in 14 years to sell five-year bonds on Dec. 14.

Monti’s budget plan risks deepening the country’s economic slump and complicating efforts to cut debt. Italy’s economy contracted 0.2 percent in the third quarter and likely shrank even more in the final three months, marking the fourth recession since 2001. The country will remain in a recession until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said.

The euro region’s third-largest economy has to repay about 53 billion euros in debt in the first quarter from the region’s total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.

Italy expects to raise almost 450 billion euros from bond and bill sales next year to cover 202 billion euros of maturing bonds and pay for a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore. The remainder of the issuances will be Treasury bills.

--Editors: Andrew Davis, Jeffrey Donovan

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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Sears Shares Plunge on Store Closings

December 28, 2011, 3:54 AM EST By Cotten Timberlake

(Updates shares price in fifth paragraph.)

Dec. 27 (Bloomberg) -- Sears Holdings Corp. tumbled the most in 8 1/2 years after saying it will close as many as 120 stores, with a deeper-than-expected sales decline casting doubt on Chairman Edward Lampert’s efforts to turn around the chain.

Lampert has tried several strategies since merging Sears with Kmart in 2005, none of which have reversed falling sales. His latest push involves moving toward smaller stores and licensing the Craftsman, DieHard and Kenmore brands. As a result, the larger stores have received less investment and prompted customers to shop elsewhere, according to Gary Balter, an analyst with Credit Suisse Group AG in New York.

Same-store sales at the largest U.S. department store chain fell 5.2 percent in the eight weeks ended Dec. 25, Sears said today. By contrast, such sales in the department-store sector as a whole will climb an estimated 4 percent in November and December, compared with the same period a year ago, according to the International Council of Shopping Centers, a New York-based trade group.

“Results were much worse than anticipated,” Balter said. The share price also was artificially high because of a very limited number of shares outstanding, he said. Today’s news also “scares” investors who are long on the stock, said Balter, who rates the shares “underperform.”

Sears fell 27 percent to $33.38 at the close in New York, the biggest decline since April 29, 2003. The shares have fallen 55 percent this year.

Bond Prices

The chain’s $987.4 million of 6.625 percent notes due in October 2018 declined 4.6 cents to 76 cents on the dollar to yield 11.9 percent today in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. That’s the lowest price since the notes were issued in exchange for other debt in August, Bloomberg and Trace data show.

Closing the Kmart and Sears stores will generate $140 million to $170 million of cash from inventory sales and leasing or sales of the locations, the Hoffman Estates, Illinois-based company said today in a statement. Sears will incur non-cash expenses of as much as $2.4 billion in the fourth quarter to write down the value of potential tax benefits and goodwill.

The company plans to reduce fixed costs by $100 million to $200 million, according to the statement.

“There is not enough value in the real estate to do much with,” Balter said. “Who is going to buy the stores? There are no buyers. There is no one growing in U.S. retail.”

Hedge Fund

Lampert, who along with his hedge fund owns 60 percent of Sears, has presided over 18 consecutive quarters of declining sales. Before today’s announcement, Sears had closed 171 of its large U.S. stores since 2005. Besides turning to smaller stores and franchising, Lampert also has been leasing space to other retailers and trying to boost Web sales.

Instead of reviving growth, Sears has lost customers and market share to discounters such as Wal-Mart Stores Inc. and Target Corp., which are attracting budget-minded consumers.

Earnings before interest, depreciation and amortization in the fourth quarter will be less than half of last year’s $933 million, Sears said.

“There is this philosophy that you don’t need to make as much of an investment in the stores if you have a brand,” Balter said in a telephone interview. “That has not worked.”

Sears didn’t identify which stores will be closed. In his annual investor letters, Lampert has identified the smaller Hometown and Sears Outlet stores as sources of growth and profit. The company opened 122 of those “specialty” stores last year, he said in his 2011 letter, and now has 945 -- less than a quarter of the total.

Biggest Exposure

Landlords with the biggest exposure to Sears are Simon Property Group Inc., which has Sears as a tenant at 137 of its 190 malls, and General Growth Properties Inc., with Sears as a tenant at 110 of its 167 malls, according to Andrew Johns, an analyst at Green Street Advisors Inc. in Newport Beach, California.

“Generally, when Sears decides to close, it’s the lower productivity stores with lower sales per square foot,” Johns said in a telephone interview. “Sears has good real estate at some malls.”

The company is allowing other retailers to sell its DieHard, Craftsman and Kenmore products. Sears has also cut deals with such retailers as Costco Wholesale Corp. and Ace Hardware to sell Craftsman tools in their stores.

“If they can just create enough cash flow to get through the downturn, at some point there is going to be a huge uptick in appliance sales,” Paul Swinand, an analyst with Morningstar Inc. in Chicago, said in a telephone interview. “They just have to make sure that when that happens they are not cut off at the knees, and that it doesn’t all go to Home Depot and Best Buy.”

Sears is to report fourth-quarter earnings on Feb. 23.

“The market is assuming there’s more bad news to come,” Swinand said.

--With assistance from Lauren Coleman-Lochner and Tim Catts in New York, and Daniel Taub in Los Angeles. Editors: James Callan, Robin Ajello

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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