Talk about awkward. Sears secured a $400 million loan this week from a hedge fund whose sole shareholder is the struggling retailer's chairman, CEO and leading investor.The unusual agreement -- and what it signals about the overall health of Sears ( ) -- spooked Wall Street. Shares of the retailer plunged another 9% on Tuesday to the lowest level sine February.
Devil's in the details: Sears, which lost $1 billion during the first half of the year, revealed the loan in a vaguely-worded regulatory filing late Monday.
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The company said the the short-term loan is being provided by entities tied to ESL Investments, whose sole stockholder and CEO is Sears head Eddie Lampert.
ESL Investments controls 24.8% of Sears's outstanding shares, making it the No. 1 stockholder. Lampert himself is listed as owning 23.7% of the company's outstanding stock.
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The filing said the loan, which carries an annual base interest of 5% plus upfront fees of 1.75%, is being secured by 25 unspecified properties. Presumably that means some of the company's hundreds of Sears and Kmart stores.
Collateral damage: The fact that Sears didn't disclose which properties are being used as collateral is raising eyebrows. The loan even gives the lender (Lampert) the opportunity to swap out certain stores with other ones.
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As pointed out by Yahoo Finance, the $400 million loan values each store at just $16 million. That's a steep discount to the $20 million to $50 million Sears has typically been selling its stores for to other retailers and investors. It also seems cheap given the $5 billion of real-estate assets listed on the Sears balance sheet.
"We don't even know all the deal terms. Are shareholders getting a raw deal here? Did Lampert undervalue the stores?" said Sozzi.
For its part, Sears said in a statement to CNNMoney that the deal does not create a conflict of interest and is in the "best interest of the company."
Even if the deal terms are fair for Sears shareholders, the fact the loan is needed doesn't bode well for the company's sales metrics, especially as it heads into the critical holiday period.