Sears filed for bankruptcy, and a media frenzy begins. Another retailer that didn’t keep up with the times, taken over by Amazon and online. What’s the big deal? Why is everyone suddenly talking about, Sears? The ‘I told you so’ reflex runs strong. Think of the friend that predicts an obvious ending to a movie and wants a pat on the back when they are right.
What is more interesting? Many were rather surprised by when Sears filed bankruptcy.
History of Predictions
Predictions of Sears’ failure have been going for nearly a decade. Without much effort, we uncovered articles every year predicting a downfall.
Looking beyond media and financial analysts, how did others do on predicting timing?
The majority of the Trade Credit Insurance market cancelled credit insurance on Sears 5 years ago or sooner. They didn’t know timing.
What about capital markets? The Credit Default Swap market ‘smart money’ certainly should have had a better idea of failure timing?
Below is over a decade overview of Credit Default Swap spreads. To be overly simplistic, it’s a measure of the market implied probability of bankruptcy.
A few things that JUMP out.
- The market expected bankruptcy during spikes in spreads – 2009 (credit crisis), 2012, late 2014, and 2017/18
- In June 2018 CDS spreads plummeted to reach nearly 2014 lows. The market thought bankruptcy was substantially less likely, right before it happened.
Timing is Difficult
Bankruptcy timing is extremely hard to predict. Despite sophisticated models and enhanced analytics, there are too many variables to account for. Sears had many examples of what made the situation unique.
It’s like being diagnosed with a fatal disease. A doctor may use data to provide a life expectancy; based on age, weight, and lifestyle. However, it’s only a best guess. There are often too many factors to consider.
Then, there are biases. For example, many got sucked into the retail holiday bias trap – ‘A retailer will only file bankruptcy after the holiday season (Q1)’. It makes sense, but is it true?
We studied timing of the 46 major retail bankruptcy filings since 2015 – only 39% filed for bankruptcy in Q1. Operating through the holiday season is logical, but doesn’t happen in practice 61% of the time.
It’s important to look at these events from many angles for lessons learned.
One key take away can be accepting the unpredictable nature of a bankruptcy filing. When financial experts predict bankruptcy, that doesn’t mean it will happen any time soon. However, sometimes bankruptcy happens substantially faster than anyone expects.
It’s a difficult position to be a vendor supplying a distressed customer. If media goes negative or credit insurance is cancelled, what are the options? Consider all angles and get in touch with us if we can ever be of assistance.
Swift Credit Risk is the market leader in providing Receivable Put Options to protect receivables or tenant rent flow from the bankruptcy. We are your consultant to simplify the process and source the lowest cost in the market. Contact us if we can be of assistance as you evaluate a Receivable Put.