Insurers Pull Back on Trade Credit Coverage for Sears Suppliers

By | May 15, 2014

Insurance companies that provide protection to Sears Holdings Corp. suppliers have scaled back policies in recent months, people with knowledge of the matter said, following seven years of declining sales at the department-store chain.

Insurers such as Coface SA and American International Group Inc. have reduced the size of so-called trade credit policies for existing Sears vendors or declined to provide protection for new suppliers, according to the people, who asked not to be identified because the matter isn’t public. AIG has cut the size of some new policies by as much as 50 percent, one person said.

Insurance companies sell policies to reimburse manufacturers if a retailer is unable to pay for their goods. With less coverage, vendors may decide to sell smaller quantities or even stop supplying products to Sears. They could also purchase credit derivatives, a more expensive way of insuring they are protected in the event of nonpayment.

Suppliers find it harder to get coverage for the retailer than any other chain, one person said. Still, Sears’s vendors have faced similar tightening in the past and it eventually subsided, according to the person. Sears suppliers also aren’t alone in seeing cutbacks. Insurers are being more cautious on some other retailers that sell electronics, which have slim profit margins, and appliances, which are expensive to produce.

‘Ample Liquidity’

Howard Riefs, a spokesman for Hoffman Estates, Illinois- based Sears, said yesterday that the company’s ties with vendors are strong and it hasn’t seen any disruption in the flow of products.

“We have ample liquidity to run the business,” he said in an e-mail. “Sears Holdings is a company rich with flexible assets, which can be reconfigured to fund our investments in our transformation.”

Jon Diat, a spokesman for New York-based AIG, declined to comment. Maria Krellenstein, a spokeswoman for France’s Coface, didn’t return phone messages.

Sears has been encouraging vendors to scale back policies with insurers and work directly with the retailer to address any concerns about payments, according to a person close to the company. Sears has enough cash to work out arrangements with suppliers in a way that’s cost-effective for both sides, the person said.

The clampdown may add to the challenges facing Sears Chief Executive Officer Edward Lampert, who’s trying to rebound from 28 straight quarters of sales declines and a $1.37 billion loss last year. He’s using a range of tactics to boost revenue, including investing in Sears’s e-commerce operation and its Shop Your Way loyalty program.

Canada Sale

The company said earlier yesterday that it was considering a sale of Sears Canada and was hiring bankers to evaluate its options. Sears owns 51 percent of the $1.5 billion business, following a partial spinoff in 2012.

Sears burned through $1.1 billion in cash last year and has sold or spun off assets to replenish its coffers, including $1 billion in real estate sales and the spinoff of its Lands’ End clothing business last month.

Sears’s stock dropped 5.9 percent to $40.70 yesterday at the close in New York. The shares have fallen 12 percent over the past year.

The cost for Sears creditors to protect against a default by the retailer has surged in the past year in the derivatives market.

Default Swaps

Credit-default swaps maturing in five years have climbed to 25.5 percentage points upfront, meaning it would cost $2.55 million initially, in addition to $500,000 annually, to insure against losses on $10 million of obligations, according to data provider CMA. That’s up from 4.5 percentage points upfront a year ago, according to CMA, a unit of McGraw Hill Financial Inc. that compiles prices quoted by dealers in the privately negotiated market.

While Sears may be working directly with vendors, guaranteeing all payments at peak-demand times could be tough, said Matt McGinley, managing director at International Strategy & Investment Group in New York.

“If every vendor demanded payment upon delivery, Sears would not have enough liquidity to meet that demand,” he said in an e-mail.

–With assistance from Noah Buhayar and Zachary Tracer in New York and Fabio Benedetti-Valentini in Paris.

Topics Carriers New York

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