California Apparel News

Industry observers call the deal a quot;short-term' solution

On July 20, CIT Group Inc. confirmed reports that its board had reached an agreement with several of its bondholders for a $3 billion secured-term loan with a 2.5-year maturity.According to the commercial lender, $2 billion is available now, with an additional $1 billion expected to be available within the next 10 days.

In a statement, CIT said it “intends to commence a comprehensive restructuring of its liabilities to provide additional liquidity and further strengthen its capital position.” The funding is “intended to provide CIT with liquidity necessary to ensure that its important base of small- and middle-market customers continues to have access to credit,” the statement continues.

For more than a week, the apparel industry has been anxiously waiting for news of a resolution to CIT’s financial crisis. News broke on July 12 that the lender, which is reported to control 60 percent of the apparel factoring market, may file for bankruptcy protection. The company then took its case to federal regulators hoping for government assistance to help CIT bolter its liquidity. But the company announced on July 15 that talks with regulators had broken down.

CIT funds more than a million businesses—many of which are small- or mid-sized companies, including many in the apparel industry. All the major apparel-industry associations—including the American Apparel & Footwear Association, the National Retail Federation and the National Counsel of Textile Organizations—sent letters to members of Congress and other leaders urging that assistance for CIT was vital to protect their small-business clientele.

“We are pleased that CIT is in a position to continue to serve our valued small-business and middle-market customers,” said Jeffrey M. Peek, CIT chairman and chief executive officer, in the statement released on July 20.“We appreciate the loyalty of our customers and the support we have received from numerous industry associations, particularly over the past few weeks.”

Short-term fix

“We believe the bond restructuring will allow CIT to address its liquidity issues in the short term,” said Kevin M. Sullivan, executive vice president of Wells Fargo Century.

“I don’t think that it necessarily addresses long-term cost-of-funds issues. I think it’s more a realization on the part of the current bond holders that restructuring the existing debt represented a better alternative to bankruptcy.”

“CIT has had a long presence within the industry,” he said “They’ve done a lot of good things within the apparel industry. It’s just a very challenging environment for them to do what they do with the structure that they currently have.”

(Wells Fargo, unlike CIT, is funded though its customer deposits, “as opposed to having to go to the bond markets and bring on short-term borrowing to fund long-term financing,” Sullivan explained.)

Attorney Gregory N. Weisman, a partner and chair of the apparel-practices group at Silver & Freedman in Los Angeles, described the $3 billion loan as “a band-aid.”

“It’s wonderful news, but it is a short-term solution,” he said. “This CIT financial scare caught a lot of people off guard; it made a lot of people nervous, and they are now exploring their options. Some of those options are changing factors entirely—changing to a dual-factoring format that permits multiple factors and spreads risk. It will be curious to see whether CIT changes its business model to mitigate against this situation in the future. Remember, a factor usually acts as the lender, bank and cash register for a business. It’s one thing if a lender refuses to lend, it’s another when the bank shuts the doors and refuses access to your own monies, and it’s yet another when your customers are contractually obligated to keep sending payments for your goods to the same people who say you can’t have your money. Scary stuff, indeed.”

Making matters worse, some nervous CIT customers may have opted to take matters into their own hands. In the past few days, as CIT stopped paying advances on invoices, some manufacturers may have started to invoice retailers directly, which is likely a violation of the factoring agreement, although there are some who believe that the factor’s refusal to lend was itself a breach of the factoring agreement. The problem, according to Weisman, is that is not a tested legal hypothesis and no factor this large has ever “failed” in recent memory. “The way a factoring agreement is typically structured, the factor owns every client invoice today and even those issued tomorrow,” Weisman said. “Some clients have made exceptions for COD, international sales or ’house accounts,’ but that’s usually it. The factor also has liens on the assets of the business, which can’t be ignored. This was unprecedented situation, and we have started to see the adage come true that desperate times call for desperate measures.”