Sears’ Payment Default Risk Has Suppliers Fleeing

Some Sears suppliers are refusing to work with the company, while others are demanding more favorable payment terms, as they struggle to find affordable accounts receivable insurance.

News reports from Reuters on Friday (Aug. 25) said these suppliers are unwilling to sell to Sears without an insurance broker that guarantees they’ll be paid even if the corporate buyer — Sears — files for bankruptcy. Multiple suppliers told the publication they wouldn’t be supplying the department store because they can’t afford the insurance.

The cost of that insurance, reports noted, spiked earlier this year after Sears warned there is “substantial doubt” over the retailer’s ability to continue, according to two vendors that spoke with the publication. The department store stopped providing this type of coverage in March, when it made that warning.

Reuters cited documents filed with the U.S. Securities and Exchange Commission (SEC), in which Sears Chief Executive Eddie Lampert’s hedge fund, ESL Investments, invested in supplier insurance broker contracts totaling $93.3 million in 2012.

In 2013, those investments hit $232 million, and in 2014, they hit $80 million, according to reports. There is no evidence of investment in vendor insurance contracts since 2015, Reuters noted, and a spokesperson for Sears declined to explain why Lampert is no longer investing in these products.

Other players in the market, including Avenue Capital Group and Euler Hermes Group, have also exited the space, causing an increase in the cost of these insurance contracts.

Sears has struggled to stock its shelves and maintain inventory as more suppliers refuse to deal with the retailer without access to accounts receivable insurance.

The department store released its second quarter earnings report late last week, noting merchandise inventory fell to $3.4 billion from $4.7 billion a year ago.

“We continue to work to manage our vendor relationships in a constructive manner,” Sears said in its report. “We will continue to ensure that our vendors deliver on their obligations to Sears.”