California Apparel News

In the wake of CIT Group’s failed attempt to reach a federal-aid deal come new worries that a bankruptcy filing could freeze business for those factored by the finance giant.CIT clients looking to quickly switch to another factor or bank may find themselves locked in by their factoring agreement, said attorney Gregory Weisman, a partner and chair of the apparel-practices group at Silver & Freedman in Los Angeles.

This becomes especially problematic if CIT files for bankruptcy.

“Technically, clients in the middle of their multiyear term can’t up and terminate their contract without seeking bankruptcy-court approval and ’relief’ from the stay that is placed automatically on the debtor,” he said. “The bankruptcy trustee gets to decide whether to let a company out of the contract after evaluating its effect on such debtor.”

For most apparel makers, any delay in funding could delay production and shipping—which could cost the company the order.

“Here, it’s a critical-timing issue,” he said. “Manufacturers can’t wait. They need to move goods. A lot of companies will probably turn to self-help remedies. They’ll ship and invoice themselves—whether they are permitted to under contract or not. That’s what people are going to do because they have no other choice. The conundrum is that the way a factoring agreement is typically structured, the factor owns every client invoice today and even those issued tomorrow. Some clients have made exceptions for COD, international sales or ’house accounts,’ but that’s it. This is uncharted territory for this industry with little precedence for guidance.”

Damage control

Hours after CIT announced its negotiations with federal regulators had broken down, West Coast manufacturers began sending letters to their retailers—and to government representatives.

Alvin Goldfarb, chief executive officer of ITC Textiles Ltd./Sublitex Inc., located in Lewes, Del., and Vernon, Calif., sent a letter addressed to a number of officials, including Vice President Joseph Biden, Speaker of the House Nancy Pelosi, Sens. Dianne Feinstein and Barbara Boxer, California Governor Arnold Schwarzenegger and members of the Senate Committee on Finance.

In his letter, Goldfarb states that his company is not factored by CIT, but many of his customers are.

“To be complacent or cavalier about helping the CIT Group get out of their current financial problem could lead to 15 percent to 18 percent unemployment and higher if CIT cannot feed the weekly funds that these companies require,” the letter continues. “This is called “advances against accounts receivables” and is the lifeline of all of these companies. The lack of these funds, in turn, will filter down to auxiliary suppliers and could send my estimate of unemployment soaring. You are looking at a meltdown that could make the automotive ’bailout’ seem like child’s play.”

In a letter sent to its vendors, New York–based Orly Shoe Corp. advised that “all payment sent to CIT will be considered invalid.” The company requested that all payments sent be directly to its corporate office or by wire transfer to the company.

According to the Wall Street Journal, CIT held a conference call on July 16 with restructuring firm Houlihan Lokey. According to the Journal, CIT has given its bondholders a 24-hour deadline to come up with $2 billion in financing or “it will likely file for bankruptcy protection.”

California Apparel News has been covering the CIT story as it develops. For the full story, including industry reaction and latest updates, go here.