DBRS Maintains Sears Canada Inc. “Under Review with Developing Implications”

Dominion Bond Rating Service (“DBRS”) has today confirmed that the ratings for Sears Canada Inc. (“Sears Canada” or the “Company”) remain “Under Review with Developing Implications”, as majority shareholder Sears Holdings Corporation (“Sears Holdings”) has not articulated a clear future financial strategy for Sears Canada. Sears Holdings announced that it will purchase the shares of Sears Canada that it does not presently hold and will convert Sears Canada into a private company. DBRS is concerned that the privatization will result in a more aggressive financial posture for Sears Canada, including the potential for large upstream payments to Sears Holdings. It remains possible, however, that Sears Canada will be allowed to retain cash and improve the financial profile of the business.

In addition to concerns over ownership, Sears Canada’s ratings remain constrained by the increasing dependence on the highly cyclical retailing business. Previously, Sears Canada enjoyed strong and stable cash flows from its financial services division. That division was sold in late F2005, with all proceeds distributed to shareholders. Under the sale terms, Sears Canada will receive ongoing revenue; however, the magnitude and consistency of those revenues remain to be proven.

The Company’s credit profile is significantly weakened from previous years, due to the uncertain cash flow and because Sears Canada has reduced the size and the quality of the asset base of the business, with no corresponding decrease in debt. The sale of the financial services division also eliminated a source of liquidity. Earnings from continuing operations remain constrained within a narrow band, as Sears Canada has been unable to increase revenues or profitability.

Notwithstanding these concerns, Sears Canada has substantial strengths including dominant position in appliance retailing, where the company has market share of approximately 30%. In addition, Sears Canada enjoys a strong reputation for consistent quality and customer service. Sears Canada also benefits from the relationship with Sears Holdings, which brings additional clout in areas such as purchasing, product development, and advertising. Improvement in ratings will require evidence that Sears Canada can generate improved and sustainable profits and cash flows, as well as evidence that the balance sheet will not be further eroded. In addition, Sears will need to demonstrate that interests of debt holders will receive due consideration.