Sears Holding Corp is having serious supply-chain trouble because of the difficulty in insuring against risk. Some vendors have abandoned the store altogether, while others are demanding stricter payment terms.
The issue worrying vendors is the scarcity and expense of a kind of vendor insurance called accounts receivable puts. The insurance ensures that suppliers will be paid even if a retailer files for bankruptcy.
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The problem? Many vendors can’t afford the specialized insurance, according to a Reuters report – especially for a troubled chain like Sears. The cost of coverage skyrocketed in March after Sears warned that there was “substantial doubt” that it would be able to stay in business.
Previously, Sears Chief Executive Eddie Lampert, through his hedge fund, invested in vendor insurance contracts worth hundreds of millions of dollars. But Sears’ regulators filings show no vendor insurance investment by Lampert since 2015, Reuters reported. Other hedge funds that invested in vendor insurance have also pulled out.
With fewer market participants, the insurance contracts have become more expensive and harder to obtain. That, in turn, has made it a challenge for Sears to keep its inventory up. Once the largest US retailer, Sears has seen its inventory plummet recently. A year ago, merchandise inventory at Seats was worth $4.7 billion. As of July 29 of this year, it had fallen to $3.4 billion.
The company has racked up $7.7 billion in losses since 2013, Reuters reported.
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