NEW YORK Sears Holdings (SHLD.O) suffered a new setback when a major business lender, CIT Group (CIT.N), halted loans that Sears' suppliers use to finance the goods they sell to the chain.
The news triggered fears that other lenders to the retailer's suppliers would follow a similar path, making it harder for the company to do business.
"It could start a snowball effect for Sears," said turnaround expert Gene Baldwin of CRG Partners.
Refusal of CIT and other lenders to finance Sears' suppliers could force it to draw on its line of credit to pay for goods up front, Baldwin said. If too many vendors seek prepayment, banks could be pressured and cut back on lines of credit for Sears, making it harder for Sears to buy inventory.
Sears shares initially fell more than 6 percent on Thursday but rallied late in the day to close up 3.3 percent.
"Investors feel comfortable that Sears will be able to handle this credit problem after an initial negative reaction in the shares," said William Lefkowitz, options strategist at New York-based brokerage firm vFinance Investments.
Some also found it positive that Edward Lampert, the company's chairman and largest shareholder, has bought more shares of the struggling retailer.
"Lampert clearly has better information than most investors given limited disclosures from the company. Additionally, his increased exposure could reflect his faith in the ongoing performance of the company," Goldman analyst Adrianne Shapira said.
According to documents filed Wednesday night, Lampert, who owns directly and through related entities about 59 percent of the company, bought roughly $159 million in Sears shares from his ESL Investments hedge fund, representing 4.46 million shares in private sales. In addition, Lampert also bought shares on the open market for about $12 million.
Still, CIT's decision to discontinue vendor financing is "an additional liquidity concern for the retailer in 2012, potentially boosting working capital requirements," Fitch Ratings said on Thursday afternoon.
CIT's action comes just weeks after Sears Holdings, operator of Sears department stores and the Kmart discount chain, posted dismal holiday sales numbers and said it would close as many as 120 stores.
"We disagree with their action," Sears spokeswoman Kimberly Freely said in an email. "In fact, we'd point out that other (lenders) are approving shipments to Sears Holdings and CIT's payables represented less than 5 percent of inventories."
Bloomberg first reported that CIT, run by Wall Street executive John Thain, will no longer approve credit for orders after Wednesday, January 11. CIT spokesman Curt Ritter said it does not comment on specific customers.
Sears, whose sales have decreased every year since Lampert formed it with the merger of Sears and Kmart in 2005, also said it "has more than adequate liquidity and ample resources at our disposal."
Investors will get some clues as to Sears' future when it reports annual results on February 23. Lampert typically publishes a letter to shareholders around that time.
The retailer, home to brands including Craftsman tools and Kenmore appliances, is feeling pressure from the economy, aggressive competition and its own reputation for run-down locations and poor customer service.
A Sears Holdings' collapse is not likely in the near future, but that could change if key vendors demand cash on delivery, decide to ship in smaller quantities, or ask for letters of credit, bankruptcy experts have told Reuters.
CIT and other finance companies, known in the industry as factors, provide short-term loans to manufacturers while they are waiting to be paid by those receiving their goods or services. Apparel and home goods are two categories for which credit is often provided by factoring companies.
When a factor pulls credit to suppliers, it could trigger a similar reaction from others, some said.
"Though CIT's factoring is only 5 percent of Sears business, I have asked smaller factors what they are thinking, (and) if everyone jumps (the) same way CIT did, then Sears will have a problem," said Munir Mashooqullah, founder and president of apparel supply chain management firm Synergies Worldwide.
One factor has turned down many requests from Sears' vendors in the past six months because of the retailer's problems.
Sears may have to pay cash on delivery in some cases if it wants vendor deliveries, this person said, noting that such a development would hurt Sears' cash flow.
"When the factoring community starts pulling back, in order to get goods, they have to provide vendors with better terms," this person said, noting that factor defections could snowball otherwise.
Factors want to see evidence Sears is fixing its business, said the person who spoke on condition of anonymity, not wanting to jeopardize relations with Sears.
A different factor, also declining to be identified, agreed that Sears would likely have to pay vendors more quickly and offer shorter payment terms to keep factors on board.
"Some of the risk managers are probably saying, 'you know what, why should we have to focus on Sears when we could ... sleep at night and factor other companies?,'" said Bobby Cohen, chief executive of Lochem Capital. His firm serves as an intermediary between buyers and suppliers.
Still he believes Sears' troubles are temporary and more a result of fear caused by troubling headlines in the media.
Sears's credit default swaps were unchanged on Thursday, while its key supplier Whirlpool's spreads bore the brunt of headlines tied to Sears.
Based on Thomson Reuters data, there is a 77 percent chance that Sears Holdings would default in the next five years.
(Reporting By Dhanya Skariachan, Phil Wahba, Amy Resnick and Melissa Mott in New York, Tom Hals in Wilmington, Delaware, and Nivedita Bhattacharjee in Chicago; Editing by Dave Zimmerman, Maureen Bavdek and Steve Orlofsky)