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Sears Holdings Chairman Moves to Protect Suppliers From Default

Sears Holdings Chairman and majority investor Edward Lampert has taken steps to insure Sears’s suppliers will be paid in the event of a bankruptcy, by purchasing an 80% interest in trade receivable put agreements. Sears total inventory has declined by $544 million year to year, to $5.1 billion. The agreements essentially function like credit insurance, but can be purchased by distressed entities and cannot be cancelled. They began growing in popularity during the credit crisis, due to their strong risk-mitigation value.

A Sears Holdings default would affect suppliers sourcing to Kmart, Sears, Sears Canada, Lands End, Jaclyn Smith, Joe Boxer, Apostrophe, and Covington brands, along with decreased sales of brands carried within the stores but not owned by Sears Holdings.

Sears Holding, the nation’s third largest retailer, announced extremely poor FY 2011 results on Feb. 23rd, 2011. Same store US sales declined 3.0% for 2011, and Canadian store sales declined 7.7%. Total loss for 2011 was $2.4 billion. According to a shareholder letter from Lampert, the company has a total liquidity of $3.2 billion, but only $357 million is held in cash – the rest is in revolving lines of credit in Canada and the United States, which may be jeopardized if financial hemorrhaging continues.

To improve their cash picture, Sears is selling 11 stores for $270 million and spinning off several of its hardware brands. At the time of the Sears – Kmart merger in 2004, total property holdings were estimated to be worth $22 billion. This asset base was believed to provide a buffer in the event of a cash crush. However, the collapse of the real estate market and profitability decreases in bricks-and-mortar stores means the actual valuation of the properties could be less than half that.

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