INSIGHT-Sears: Why the troubled chain's vendors are worried
By Nathan Layne
CHICAGO Oct 5 (Reuters) - Sears Holdings Corp.'s deepening financial troubles have forced insurers and banks to raise the cost of guaranteeing payment to vendors, rattling the retailer's supply chain as the company heads into the key holiday season.
The move by these financial intermediaries -- in an opaque but vital quarter of the retail business where makers of goods ranging from apparel to TVs seek to insure they get paid -- comes in the wake of unusual steps Sears has taken to raise cash for operations. In the past three weeks, the retailer twice has turned to its billionaire CEO Eddie Lampert's hedge fund for a cash infusion -- first as the anchor on a $400 million loan and then again Thursday as a buyer for most of its stake in the ailing Sears Canada. Sears aims to raise $380 million with that deal.
Sears spokesman Chris Brathwaite said the company is on track to raise $1.45 billion this year, a sign of its "financial flexibility" and capacity to meet its obligations. He said the company has the financial resources to work directly with vendors and that there has not been a significant impact on its supplier relationships following the events of the past few weeks.
CASH FLOW CONCERNS
Suppliers, however, have become increasingly concerned about the company's financial strength. The retailer, which oversees some 2,300 Sears and Kmart stores, has lost about $6 billion since 2012 and its margins are far below the industry average.
To protect themselves from the risk of non-payment, suppliers sometimes will buy insurance on their receivables. In more extreme cases, they purchase a derivatives contract, called a put option, that pays out if the company defaults. With concerns about Sears' cash flow on the rise, insurers have sharply reduced coverage. And put options have become so costly they no longer make economic sense for some suppliers.
Large underwriters of credit insurance - vendors' conventional first line of defense against nonpayment -- essentially have stopped offering coverage on Sears for new clients, insurance brokers said. Euler Hermes Group, one of the top underwriters, told clients this week that it was cancelling coverage for new shipments, said a person informed of the new policy. Euler Hermes declined to confirm those cancellations, but said it was closely monitoring the situation. Continued...