What a tremendous collapse! Sears was rated AAA as recently as 1980 (and actually was still a very trustworthy A- in the early 2000’s). To put this in perspective, currently there are only 2 companies in the entire US that earn that AAA rating (Microsoft and Johnson and Johnson – to save you time).
Who would ever have thought that bankruptcy would be looming. This icon of US retail went into a tailspin and just never recovered. There is a myriad of reasons for the fall – this will be a classic business case for years to come – but rather than rehash what so many others have analyzed and are speculating, this addresses what the receivables insurance (also known as credit insurance) industry did in response.
A little over 3 years ago, when the collapse of Sears was becoming a vivid reality, the receivables insurers started warning their policyholders that Sears was in trouble. While in most cases existing policyholders were able to retain coverage, they were made well aware of the impending disaster. The advice from the insurers was to be restrictive, provide shorter terms and thereby reduce the credit exposure to Sears.
The reaction of the brokerage community reflected what the brokers were seeing from their receivables insurance providers. They were notifying their clients about the state of coverage capacity for Sears’ credit while at the same time urging those companies to take the actions being recommended by the underwriters.
There are loads of suppliers out there that still held on to the Sears legend. Surely a company that had been around since 1887 and at its peak, had sales in excess of $50 billion more than 350,000 employees and more than 4000 stores, was just too big and too well established to fail. Add to that payments were being made on time and the fact that they were owned by a private equity firm that was sure to be a white knight should things continue to go south. However, in the last couple of years, some of those suppliers began to see that perhaps the legend was not all it was cracked up to be and began to look for alternatives – would receivables insurance be available?
Trying to buy fire insurance when the house is already on fire? Unfortunately for those looking for receivables insurance coverage at that late date, that analogy was all too accurate. Insurers and brokers were doing their best to retain as much coverage as possible for existing policyholders. The trick was that although they knew that an insolvency was virtually inevitable, they were unable to predict exactly when. Policyholders were advised to reduce their dependency on sales to Sears and hold on to whatever coverage they were able to retain as Sears march to inevitable bankruptcy played out.
On the date of bankruptcy, the receivables insurance industry, of course, had coverage in place. Hundreds of thousands of dollars in claims will be eligible.
While the claims proceeds will be appreciated by holders of receivables insurance policies, it is instructive to understand what else those policies contributed. Notwithstanding the claims, perhaps one of the most important benefits was the advice policyholders received on Sears’ creditworthiness. As the risk deteriorated, policyholders were well advised with plenty of warning time to find new markets for their wares (true story – a seller of high-end kitchen appliances whose sales to Sears represented 50% of their total sales, dropped Sears as a buyer with the result that the bottom line actually increased) so that when Sears finally did file, the impacts on the top lines were nowhere near as significant as they might otherwise have been. A smooth transition while exiting this major account not only keeps investors happy, but also impresses the banks by the ability to plan for and neutralize the sales base change.
Receivables insurance provides vital information on credit risk for both domestic and export transactions. For more information please contact Mark Attley at mark.attley@receivablesinsurancecanada.com.
