Bloomberg News

Sears Falls After Vendor Loans Are Said to Be Halted by CIT

January 25, 2012

(Updates with broker’s comments in third paragraph.)

Jan. 12 (Bloomberg) -- Sears Holdings Corp. declined after two people familiar with the situation said suppliers will no longer be able to get loans or payment guarantees from CIT Group Inc. for their shipments to the retailer.

Sears fell 4.8 percent to $31.33 at 11:54 a.m. in New York. The Hoffman Estates, Illinois-based company’s shares dropped 56 percent last year.

CIT, the largest U.S. company that provides what’s known as factoring, told clients it would no longer approve credit for orders starting today, according to the people, who declined to be identified because the information isn’t public.

One risk when a factoring company pulls credit to suppliers is that others may follow suit. Some factors already have become reluctant to take on shipments to Sears, while others are demanding a “substantial” premium, Bobby Cohen, chief executive officer of Lochem Capital, said today in an interview.

“There’s so much low-hanging fruit out there that they say to themselves, ‘I don’t need to have a dog in this fight,’” said Cohen, whose Roslyn, New York-based company serves as a broker between buyers and suppliers. The upheaval probably will be temporary, he said.

Sears has enough liquidity that it will weather the situation, said Matthew McGinley, managing director at International Strategy & Investment Group in New York.

“Even with Sears’s deteriorating financial condition, it is pretty unlikely that a vendor shouldn’t ship over the near term,” he said yesterday in a telephone interview.

Declining Sales

Sears has lost ground as shoppers have flocked to such rivals as Macy’s Inc. Chairman Edward Lampert, who along with his hedge fund owns about 60 percent of the U.S. department store chain, has presided over four years of declining sales since merging Sears Roebuck with Kmart in 2005.

Goods factored by CIT represent less than 5 percent of the company’s inventory, Sears said.

“We disagree with their action” and “point out that other factors are approving shipments to Sears,” Chris Brathwaite, a Sears spokesman, said yesterday in an e-mailed statement. “It’s important to note, that Sears Holdings has more than adequate liquidity and ample resources at our disposal.”

Lampert bought 4.46 million shares from his ESL hedge fund at $29.20 per share, according to a regulatory filing yesterday.

CIT Fees

Factoring companies such as New York-based CIT provide money on a short-term basis for manufacturers to produce goods for retailers. In return, they get a fee based on a percentage of the total order.

“We don’t comment on specific customers,” Curt Ritter, a spokesman for CIT, said yesterday in a telephone interview. The New York-based company is led by John Thain, formerly chairman and chief executive officer of Merrill Lynch & Co.

Clothing and home goods, items for which credit is often provided by factoring companies, account for about 28 percent of Sears’s sales, according to Gary Balter, an analyst at Credit Suisse Group AG. Lands’ End and other private-label goods sold by Sears aren’t factored.

Whirlpool, Electrolux

Sears has a $3.275 billion credit facility, in addition to other assets and credit in Canada, McGinley said. Larger and healthier vendors to Sears don’t need to use factors, he said.

Still, even the largest suppliers are affected by Sears. Appliance maker Whirlpool Corp., which received 8 percent of its 2010 revenue through Sears, fell 8.9 percent on Dec. 27 when the retailer said holiday sales declined and it would close as many as 120 stores.

Whirlpool’s only larger customer in 2010 was Lowe’s Cos., according to data compiled by Bloomberg.

Stockholm-based Electrolux AB got 5.8 percent of its revenue through Sears in 2010, making Sears the biggest customer for its appliances. Electrolux dropped 2.5 percent after the store closings were announced.

Credit-default swaps that protect investors against a default by Sears soared to a record. The contracts jumped 10.5 percentage points to 44.9 percent upfront as of 10:30 a.m. in New York, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $4.49 million initially and $500,000 annually to protect $10 million of Sears’ debt.

Swaps tied to Whirlpool’s debt, which typically rise as investor confidence deteriorates, jumped to the highest level since April 2009, adding 21 basis points to 349, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

--With assistance from Kevin Orland in Chicago and Shannon D. Harrington in New York. Editors: Kevin Orland, Robin Ajello

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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