09/17/2014 03:21 EDT | Updated 06/16/2017 00:57 EDT

Sears shares plunge after it borrows $400M from its own CEO

Sears shares plunged 9.4 per cent Tuesday and another 2.6 per cent Wednesday after it revealed it had borrowed $400 million form a hedge fund owned by CEO Eddie Lampert.

Investors were disappointed that the retailer, which has sold assets such as its Lands End business to raise cash, does not have enough money to get through the holiday season.

More than four million shares have changed hands in the last two days and the stock is down 22 per cent since the beginning of the year.

U.S.-based Sears losses in the second quarter widened to $573 million from $194 million in the year-ago period.

Burning through cash

Analysts said it has been burning through cash at a rate of $140 million a month, but Lampert has not been able to stem the tide of losses.

Sears said the loan "allows us additional financial flexibility, particularly as we enter the holiday season." The company said it wants to be "proactive" in showing vendors and others it will "continue to generate liquidity needed to invest in our business and meet all of our financial obligations."

Lampert’s ESL Investments is making the loan, which is short-term in nature and will be secured by 25 of the Sears’ retail properties. The interest rate is five per cent and an upfront fee totals about $7 million, according to a regulatory filing.

That also raised questions of conflict of interest, as it may undervalue Sears’ prime retail locations and ensures Lampert benefits, though shareholders may not. ESL is Sears’ biggest shareholder.

Sears signalled in May it planned to sell its Canadian operations to raise cash, but so far no buyer has come forward. Instead, it is selling off individual properties here.

 Sears Canada Inc. and its U.S. parent are being sued by by its Hometown Store dealers who have launched a class action in Ontario, saying Sears  made it “virtually impossible” for them to operate their Hometown Stores profitably. 

Sears Holding Corp. stock closed at $29.56, down 81 cents on the day. Sears Canada stock has also fallen over the last two days from $16.65 to $14.80.