Moody’s Investors Service, has downgraded asset-backed notes issued by KCD (Kenmore, Craftsman Diehard) IP, LLC to Caa2 (sf). The notes are currently secured by royalty payments from Kenmore and DieHard trademarks after (Sears) has completed the sale of the Craftsman brand to Stanley Black & Decker in March 2017. KCD IP, LLC has licensed the trademarks to subsidiaries of Sears: Sears, Roebuck and Co. and Kmart.
The rating action reflects the continued negative performance of Sears’ domestic business with continued weak sales performance and negative operating cash flow and the resulting recent downgrade of Sears Corporate Family Rating to Caa3 from Caa2 by Moody’s.
There is a high degree of linkage between the credit quality of Sears and the credit quality of the KCD transaction. The royalty revenue for the current securitization depends on the sales generated by the remaining securitized brands of Kenmore and DieHard as well as on the operating performance of Sears. Sears retail operations are the primary sales channel for Kenmore and DieHard products. KCD has licensing agreements with Sears’ subsidiaries, Sears, Roebuck and Co. and Kmart to receive royalties as a percentage of all domestic net sales of Kenmore and DieHard products. Therefore, the continued revenue contraction of Sears and their continued store closures increases the risk of declining royalty revenue for the KCD notes.
However, the rating of the asset-backed notes is higher than the Sears Corporate Family rating of Caa3, reflecting value in the remaining brands of Kenmore and DieHard. Sears successfully completed its sale of the Craftsman brand to Stanley Black & Decker in March 2017. In connection with the sale, Sears redeemed $900 million of the KCD notes.