Duff & Phelps Credit Rating Co. (DCR) does not expect there to be any negative rating implications for Sears Roebuck and Co. as a result of Sears recent earnings announcement, which disclosed adverse trends in its credit card business.
Of concern is that the company is continuing to record significant increases in delinquency and charge-off rates, contrary to industry experience. While the adverse credit trends will likely affect fourth quarter 1997 results, the negative impact should be mitigated by the recent implementation of more proactive risk management practices. Positively, Sears` retail businesses remain fundamentally strong and well positioned. DCR rates the senior debt of Sears, Roebuck and Co. and its financing subsidiary, Sears Roebuck Acceptance Corp. (SRAC) `A` (Single-A). SRAC`s commercial paper is rated `D-1` (D-One).
Adjusting for FAS 125, Sears recorded an 85 percent or $231 million increase in the provision for uncollectibles during third quarter 1997. While there has been a flattening of personal bankruptcy filings, delinquencies and losses continue to rise. At the end of third quarter 1997, 60-day-plus delinquencies comprised 6.9 percent of the portfolio versus 5.3 percent a year ago and 5.9 percent at the end of second quarter 1997. The higher delinquencies and losses are largely associated with Sears aggressive investment in new account growth of recent years. Sears has responded by slowing new account origination activity, bolstering its collections operation and reducing credit lines to customers who are showing negative trends in behavioral patterns and creditworthiness. Positively, higher pricing initiated earlier this year allowed the net interest margin to expand by $259 million or 288 basis points, which mitigated the effects of rising losses. Sears` asset quality trends are contrary to industry performance and are deviating from the company`s own historical experience. Consequently, management is not comfortable in forecasting near-term financial performance in its credit card operations or on a consolidated basis, but DCR does not believe the current difficulties will warrant any rating action.Details