Sears Suppliers Halting Shipments as Insurers Cut Coverage

By Lauren Coleman-Lochner | October 9, 2014

Three of the biggest insurance firms for Sears Holdings Corp.’s suppliers are seeking to reduce coverage, prompting at least one medium-sized vendor to halt shipments to the department-store chain, people with knowledge of the matter said.

Euler Hermes Group, one of the top providers of credit insurance to vendors, has been sending out cancellation notices, according to the people, who asked not to be identified because the information isn’t public. Coface SA has indicated that it intends to do the same, two of the people said. Atradius Credit Insurance, another of the insurers, said it’s scaling back coverage, though the firm hasn’t yet pulled policies.

The situation has spurred one supplier to withhold products from Sears after a recommendation from its credit department, according to an e-mail obtained by Bloomberg News. The vendor, a closely held company, asked not to be named.

Sears’s shares fell 4.8 percent to $28.85 today in New York. The stock has dropped 27 percent this year, reducing its market value to about $3.1 billion.

Suppliers rely on credit insurance to protect themselves against not getting paid for products they ship to retailers. For Sears, which has posted 30 straight quarters of declining sales, the shrinking support from insurers may make it harder to stock products and execute a comeback.

‘Widespread Implications’

“The action of the insurers has widespread implications,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. Even companies that don’t rely on insurance tend to see this activity as a gauge of a retailer’s health, he said.

Sears, based in Hoffman Estates, Illinois, said it works closely with vendors and has never paid anybody late. The company also has the financial ability to make arrangements directly with suppliers.

“We continue to meet all of our obligations,” Chris Brathwaite, a company spokesman, said in an e-mail. “We are continuing to work with our vendors and suppliers and are communicating with them regularly as we move through our transformation. To date, we’ve had no interruptions in the flow of goods to our company.”

Products Flowing

In a later statement posted on Sears’s website, the company called Bloomberg’s article misleading and said it wanted to make sure vendors had “all the facts.” The company has almost $6.5 billion in inventory right now and stores are well stocked, Sears said.

“We also enjoy long-term supply contracts with several of our major vendors which ensure us a regular flow of goods in some of our most important categories,” the company said.
Bloomberg News, citing people familiar with the matter, reported in May that insurance companies were scaling back policies and declining to provide protection for new Sears suppliers. American International Group Inc. had cut some new policies by as much as 50 percent, one person said. The Wall Street Journal also reported last week that Euler is canceling policies. AIG declined to comment.

The latest moves may further strain the resources available to Sears suppliers. David Huey, the president and regional director of U.S., Canada and Mexico for Atradius in Baltimore, said his firm is decreasing its Sears supplier coverage “as the problems have become more obvious.”

Watching Closely

“We’ve reduced as we’ve seen the risk increase,” he said in an interview. Though no policies have been canceled, “it could happen,” he said. “We’re reviewing it regularly.”
Jochen Duemler, chief executive officer of Euler Hermes Americas, declined to comment on

Sears beyond saying his company was continuing to “closely monitor” the situation. Representatives for Coface didn’t respond to requests for comment.

Under the terms of most policies, insurers are allowed to cancel if a retailer’s operations deteriorate enough that its viability is in doubt, according to one of the people. Insurers canceled policies in the months before Borders Group Inc. and Circuit City Stores Inc. filed for protection from creditors, the person said.

Joe Sarachek, a managing director at CRT Capital Group, said he’s spoken to several Sears vendors that have had their insurance coverage canceled. His firm, based in Stamford, Connecticut, offers financial and advisory services, including dealing with assets from distressed companies.

Selling Assets

Sears CEO Edward Lampert, who also is the company’s biggest investor, has been unloading assets to generate cash after nine straight quarters of losses. Last week, the company announced plans to sell most of its stake in Sears Canada Inc., helping it raise as much as $380 million.

While the cancellation of vendor coverage is a red flag, retailers can recover from it. That was the case with J.C. Penney Co. Insurers cut protection for the department-store chain’s suppliers and then restored coverage when business rebounded, a person familiar with the matter said. Daphne Avila, a spokeswoman for Plano, Texas-based J.C. Penney, declined to comment.

Vendors have some other options if coverage is eliminated, including purchasing trade receivable put options, which pay for the value of goods shipped if a merchant runs out of money. A supplier could also insist on payment in advance or get a letter of credit guaranteeing payment, although only large vendors would likely have the clout to demand those measures.

Wall Street options traders also are increasingly taking a pessimistic stance, concerned that the company may be running out of ways to turn itself around.

Growing Skew

Options hedging against a 10 percent decline in Sears shares cost 19 points more than calls betting on a 10 percent gain on Oct. 2, according to three-month implied-volatility data compiled by Bloomberg. That was the widest spread since at least 2004, and up from minus 0.2 in July. The measure, known as skew, had an average of 4.1 in the last three years.

Bearish options cost 13.3 points more than bullish ones yesterday, three-month data compiled by Bloomberg show.

Put contracts outnumbered calls on Oct. 3 for the first time since January 2013, according to data compiled by Bloomberg.

Sears’s Brathwaite said that misunderstandings about the company’s condition may be influencing insurers and investors.

“Put prices and other forms of insurance reflect perception unfortunately and not factual reality,” he said. “Fortunately, due to our substantial financial resources, we have the ability to deal directly with our vendors.”

(With assistance from Noah Buhayar and Callie Bost in New York and Inyoung Hwang in London.)

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