Sears Swaps Soar to Record as CIT Said to Halt Vendor Loans

The cost of protecting Sears Holdings Corp. (SHLD)’s debt from losses surged to a record following reports that suppliers will no longer be able to get loans or payment guarantees from CIT Group Inc. for their shipments to the retailer.

Credit-default swaps on Hoffman Estates, Illinois-based Sears jumped 7.6 percentage points to 42 percent upfront as of 5 p.m. in New York, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $4.2 million initially and $500,000 annually to protect $10 million of Sears’s debt.

CIT, the largest U.S. company that provides so-called factoring, told clients it would no longer approve credit for orders starting today, Bloomberg News first reported yesterday, citing people who declined to be identified because the information isn’t public. Goods factored by CIT (CIT) represent less than 5 percent of the company’s inventory, Sears said.

Factoring companies such as New York-based CIT provide money on a short-term basis for manufacturers to produce goods for retailers. In return, they get a fee based on a percentage of the total order.

“We disagree with their action” and “point out that other factors are approving shipments to Sears,” Chris Brathwaite, a Sears spokesman, said yesterday in an e-mailed statement. “It’s important to note, that Sears Holdings has more than adequate liquidity and ample resources at our disposal.”

Whirlpool Swaps

Swaps tied to Whirlpool Corp. debt jumped to the highest level since April 2009, adding 16.3 basis points to 342.9, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The Benton Harbor, Michigan-based appliance maker received 8 percent of its 2010 revenue through Sears. Its only larger customer in 2010 was Lowe’s Cos., the home improvement retailer, according to data compiled by Bloomberg. Whirlpool fell 8.9 percent on Dec. 27, when Sears said holiday sales declined and it would close as many as 120 stores.

A benchmark gauge of U.S. company credit risk dropped to the lowest level since October as reduced borrowing costs at Spanish and Italian auctions eased concern Europe’s sovereign- debt crisis is getting worse.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, decreased 1.3 basis points to a mid-price of 114.7 basis points as of 5:10 p.m. in New York, according to Markit Group Ltd.

Spanish Bond Sale

The gauge slid for a fourth day as Spain sold 10 billion euros ($13 billion) of bonds, twice the target for the sale, while Italy sold 12 billion euros of bills, easing concern the countries are struggling to finance their debts. The auctions outweighed government reports that showed sales at U.S. retailers rose in December less than projected and more Americans than forecast filed applications for unemployment benefits last week.

The index, which typically falls as investor confidence improves and rises as it deteriorates, touched 113.6 basis points, the lowest level since Oct. 28.

The U.S. two-year interest-rate swap spread decreased 2.7 basis points to 35.1 basis points after touching 34.5 basis points, the narrowest since Nov. 8.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The interest-rate swap spread is based in part on expectations for the London interbank offered rate and used to gauge investor perceptions of credit risk.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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