California Apparel News

CIT Group Inc., the largest apparel factor on the West Coast, has been vastly affected by the credit crunch filtering through lending institutions.

On March 20, the largest independent U.S. commercial finance company had to draw on its entire $7.3 billion in emergency credit lines to pay debt maturing in 2008.

The New York company, with offices around the world, will have to seek more funding sources as well as perhaps sell some of its nonstrategic assets or business lines to help raise cash, the company said.

“Our decision today is a result of the protracted disruption in the capital markets as well as recent actions by the rating agencies,” said Jeffrey Peek, CIT’s chairman and chief executive, in a statement.

Recently, both Moody’s Investors Service and Standard & Poor’s cut some of CIT Group’s credit ratings because of the company’s reduced financial flexibility due to credit-market turmoil.

CIT is the largest factor in the United States for apparel companies and retailers. It has a huge presence in Los Angeles. More than 50 percent of its national accounts are on the West Coast.

The news of CIT’s financial faltering sent a chill through the apparel industry, which depends on factors such as CIT to buy their accounts receivables and then collect the money from retailers. This form of financing gives apparel manufacturers their money faster and leaves the collection headaches to the factors.

“This could hurt the apparel industry because CIT will be very cautious in making loans to manufacturers,” said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., which tracks the city’s economy and attracts businesses to the community. “They will also get even more rigorous in their analysis of the financials of the companies, and this is not good news for an industry that we know will face tough times in the next 12 months. It will be quite tough for a few of the smaller firms if they can’t find financing.”

Some apparel manufacturers have already noticed that CIT was getting strict with lending. “There are certain retailers that are having problems [getting approval from CIT],” said Tony Litman, president and co-chief executive of Stony Apparel Corp., a Los Angeles company that makes childrenswear and juniorswear. CIT is Stony’s factor.

With this latest round of bad news in the financial community, credit undoubtedly will become harder to obtain, and interest rates could go up.

For many apparel manufacturers—such as Just for Wraps Inc., a juniorswear manufacturer in Commerce, Calif., whose labels include Wrapper and A-List—contracts with CIT tie their interest rates to the current prime rate. “If you have a contract that is tied to the prime lending rate, like we do, then it is good for the next year or two years and can only fluctuate with the prime lending rate,” said Rakesh Lal, the executive vice president of Just for Wraps. “On the other hand, when the contract expires and they want to give a less favorable rate, then that could happen. But they have to be competitive with other factors.”

Many apparel factoring companies believe that manufacturers and retailers that are on sound financial ground won’t be as affected as less-viable firms. “I think a good company won’t have any trouble getting financing out in the marketplace,” said Ron Vanek, executive vice president, western regional manager at GMAC Commercial Finance in Los Angeles. “But companies that are marginally profitable or are losing money will have to pay more for their financing in 2008 than they did in 2007, maybe 1 percent more.”

Ken Wengrod, president of FTC Commercial Corp. in Los Angeles, said he believes this could impact interest rates and the cost of money for borrowers in the apparel industry. “But the world is not coming to an end,” Wengrod said. “Generally in the capital markets today, for anything under $150 million [loan], there is a tremendous amount of money available.”

Jeff Enoch, senior vice president at Rosenthal & Rosenthal Inc., a family-owned factor in Los Angeles that has been around since 1938, said there are plenty of banks and financial institutions waiting to take up the financial slack. “Our local apparel industry will be fine. There are plenty of finance companies that are looking to increase their business,” Enoch said.

Dave Reza, senior vice president, western region at Milberg Factors Inc., said the apparel industry will be taking a hard look at its lenders. “I think apparel manufacturers will be focused on the health of their lenders to make sure the financing they need is there and that the credit guarantees that have been made will be honored,” Reza said.