Future of Sears puts vendors in predicament

Sears Holdings Corp. suppliers who are deciding whether to keep shipping goods to the retailer are seeing warning signs from the market for bankruptcy claims.

In a bankruptcy case, administrative claims from firms that help keep the business running are among the first to be paid, and these IOUs can become a tradable asset. Suppliers can sell them at a discount to cash out, thus avoiding the risk that the company will run out of money. The buyers are betting that the claims eventually will be honored and return more than they paid.

But few buyers have emerged for the Sears administrative claims, and the bid prices are far below where they stood at a similar stage of Toys “R” Us Inc.’s bankruptcy, according to people with knowledge of the situation. The toy retailer looms large because its rapid descent into liquidation in March wiped out some claims buyers. And Sears isn’t helping matters with its delay in securing some of its bankruptcy financing, said the people, who asked not to be identified because the sales are private.

“Toys ‘R’ Us spooked the trade claims market,” said Gregory Plotko, a partner in the bankruptcy practice at Richards Kibbe & Orbe. “Accordingly, claims buyers are being more cautious with Sears claims and are waiting to see how the case develops.”

A representatives for Sears declined to comment.

Claims traders are offering Sears vendors about 65 to 70 cents on the dollar, whereas Toys “R” Us claims fetched as much as 85 cents early in the toy chain’s bankruptcy process, according to the people.

While bids in the Sears claims market are weak, their existence is a sign that some faith in Sears remains, and there have been more willing buyers over the past few days, according to one person.

Shipping goods after the filing or “post-petition” typically is seen as safe because those payments get such high priority. But Toys “R” Us changed that calculation because the swift collapse shortchanged many vendors and claims buyers, with recoveries expected to be about 20 cents on the dollar.

While Sears says it’s making progress on lining up new cash, turning around the business may be harder to pull off because suppliers have already balked at cooperating due to the uncertainty.