The financial worries of Sears Holdings Corp (NASDAQ:SHLD) are far from being over and considering its shaky financial standing, banks as well as insurers have raised payment guarantee costs for the vendors making it difficult for vendors to conclude business ahead of the holiday season.
One of the primary reasons for these precautionary announcements is the unusual steps taken by the retail giant to avail credit from the market. The company has availed loans from its CEO’s, Eddie Lampert, hedge fund twice in the last three weeks including a $400 million anchor loan followed by a $380 million Sears Canada deal.
Chris Brathwaite, spokesman for Sears, said that the retailer is likely to raise up to $1.45 billion this year, which highlights its “financial flexibility” and ability to fulfill its obligations. He further added that the company has a sound relationship with its suppliers and the financial resources to work directly with the vendors. However, these official statements are far from infusing trust into the investors considering the fact that Sears Holdings Corp (NASDAQ:SHLD) has lost nearly $6 billion since 2012 with its gross margins much lower than industry standards.
In regular business dealings, suppliers buy insurance against their receivables or a derivatives contract in extreme cases, which ensures payment in case the company defaults. With rising financial troubles of the retailer, insurers are offering a limited coverage with sharp reduction and higher put options costs. As a matter of fact, large underwriters such as Euler Hermes Group are cancelling coverage for any new shipments from Sears, according to a person familiar with the matter, although Euler has declined any such updates.
David Huey, president of Atradius U.S. Operations, said, “We have contracted our cover to where we are comfortable for the moment but we will continue to monitor the situation because everyone knows it is not a comfortable one.” Further, put options are extremely expensive right now and have “sky-rocketed into the uneconomical range,” according to Marc Wagman, Aequus Trade Credit MD, and he further added, “Sears suppliers in this case have few options.”
One of the primary reasons for worry about the recent Lampert loan was the fact that it was secured with 25 properties hinting potential financial trouble in near future.
This article has been written by Prakash Pandey and edited by Serkan Unal.