CIT Emerges From Chapter 11
CIT Group emerged from Chapter 11 bankruptcy protection on Dec. 10 after the U.S. Bankruptcy Court for the Southern District of New York confirmed CIT’s prepackaged plan of reorganization two days earlier.
The reorganization plan will reduce CIT’s total debt by approximately $10.5 billion and defer debt maturities for three years. The plan will also improve capital ratios “to levels that exceed regulatory requirements,” according to the New York–based company.
“As a result of the overwhelming support for our plan, CIT now has a stronger capital structure and improved liquidity profile,” said CIT Chairman and Chief Executive Officer Jeffrey M. Peek. “Our board of directors and management team now have the time and flexibility to execute the balance of CIT’s restructuring strategy, including maximizing the value of its existing assets and optimizing the business model.”
CIT is the largest factor to the apparel industry, and the company’s financial troubles have been closely watched by apparel manufacturers and retailers for the past year. CIT acknowledged its position as lender to many small businesses.
“CIT’s market-leading positions are derived from our strong relationships with 1 million small-business and middle-market customers,” Peek said. “We are committed to continue lending to these vital sectors, which will help support much-needed job creation and contribute to the recovery of the U.S. economy.”
Once out of bankruptcy, CIT plans to commit $500 million to support its Small Business Lending group and $1 billion in funding for its vendor financing operating segment. The company said these funds are in addition to a previously announced commitment of $1 billion in funding for its trade finance operating segment, which factors mid-sized companies.
The company will also continue restructuring its board of directors, which will ultimately include 13 directors, including seven new independent directors, who will be named by the company’s debtholders; five continuing directors; and a new chief executive officer to replace Peek, who is leaving the company at the end of the year.
Over the summer, word of CIT’s financial troubles began circulating throughout the apparel industry. CIT had run into trouble after investing in student loans and sub-prime mortgages. The company had been relying on short-term dept to cover its expenses. In late 2008, CIT received $2.3 billion from the Treasury Department’s Trouble Asset Relief Program.
Although CIT’s difficulties had little to do with its factoring unit, CIT Trade Finance, the company briefly stopped lending as it considered its options. Several large bondholders stepped in with 11th-hour financing, and the company considered two possibilities: a debt-exchange offer and a prepackaged restructuring plan. The debt-exchange offer fell through, and on Nov. 1, CIT filed for Chapter 11 bankruptcy protection in what was the fifth-largest bankruptcy in U.S. history.
CIT was adamant that it could emerge from bankruptcy before the end of the year. And according to many in the industry, business continued as usual during the bankruptcy.
“It’s been very transparent,” said Steve Barraza, chief executive officer of Los Angeles–based manufacturer Tianello. Barraza said there were a few days in the summer when it was difficult to get payment for invoices from CIT but that since the bankruptcy filing, everything had returned to normal.
Michael Weisberg, chief executive of Second Generation Inc., a juniorswear manufacturer based in Vernon, Calif., said he used to be factored by Continental, which refactors through CIT Group. But he got nervous and in February decided to factor with Rosenthal & Rosenthal.
“We started to get real nervous about CIT more than one year ago, and that is why we made the change,” he said.
He noted that most retailers and manufacturers were most worried in June, when CIT’s problems came to a head. “When CIT did finally file for bankruptcy, it was anticlimactic. People had been expecting it for a long time. Honestly, I’ve seen no impact at all from their filing bankruptcy,” he said.
Weisberg said his major clients—such as Macy’s, Nordstrom and the Stage Door—have been extending their own credit if they couldn’t get factored.
Lonnie Kane, president of Vernon, Calif.–based Karen Kane Inc., is also a CIT customer, and CIT bankruptcy had no impact on his business. “I wasn’t impacted one bit from when it began through now,” he said. “I’m happy with them exiting Chapter 11; it’s behind us now.”
Kane acknowledged that CIT’s financial troubles had an impact on the apparel industry overall.
“It was a worry that had been over people’s heads for quite a while—even if you weren’t factored with them,” he said. “If they factored people you bought piece goods from, you were affected by it.”
With CIT out of bankruptcy, “it brings calm back in the financial world of apparel, and certainly that’s a good thing,” Kane said.
