Trading Halted on CIT, Deal Could be Announced Soon
The New York Stock Exchange halted trading on shares of CIT Group Inc., according to several news sources, which said a temporary loan could be announced in the next 24 hours.
CIT, the largest factor to the apparel industry, has been negotiating with federal regulators all week in an attempt to bolster its liquidity. The situation has industry watchers nervous about the potential impact on a large swath of fashion companies.
CIT funds more than a million businesses—many of which are small- or mid-sized companies, including many in the apparel industry. The company and federal regulators have been working on an aid package that would allow the company to remain afloat.
After news of the commercial lender’s problems broke on July 12—including a Wall Street Journal Report that the company had hired attorneys to explore a possible bankruptcy filing—many companies drew down their lines of credit.
Any disruption in CIT’s business could have a far-reaching impact on the apparel business. According to some in the industry, CIT was able to leverage its market penetration to offer lower financing terms than more-conservative lenders.
No matter what happens with CIT’s negotiations with regulators, the repercussions for the apparel industry are far reaching, from small- and mid-sized manufacturers to specialty stores and independent sales representatives.
“Anyone who is factored is going to be affected,” said Ilse Metchek, president of the California Fashion Association.
Among the likely changes will be stricter rules for lending money, more-limited access to credit and increases in lending rates.
“Purchase-order financing is very expensive [compared with traditional factoring],” she said.
But Metchek notes there will be alternative ways to do business. Other than paying cash, most alternatives carry their own sets of risks to retailers and manufacturers.
“Cash is king at the manufacturing level,” Metchek said. “The word consignment is coming up. But consignment demands a re-evaluation of accounting procedures, a recounting of terms and insurance policies. CBT—“cash before delivery.” That means the retailers who are laying out hard-pressed cash are not going to buy from an untested resource. A new company is a risk. COD is problematic. If the retailers’ business is bad, they can always refuse delivery.”
The only companies well-positioned to weather this crisis are those well-funded companies with good cash flow and large orders with major retailers.
CIT referred inquiries to a statement released on July 12. The company has applied for FDIC’s Temporary Liquidity Guarantee Program and is “is also actively discussing liquidity solutions that do not involve access to the TLGP program,” according to the statement. Among the possible solutions CIT is pursuing are a “near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its vendor finance and trade finance businesses into CIT Bank.”
CIT, however, is non-committal about the outcome or timeline of its efforts to bolster liquidity, noting in a statement that “there can be no assurance that any of CIT’s discussions with the government will result in any regulatory action nor as to the timing or terms of any such approvals.”
In late 2008, the Federal Reserve approved CIT’s application to become a bank holding company, which qualified CIT to apply for federal bailout money. In late December, the company received $2.33 billion in TARP (Trouble Asset Relief Program) funds from the U.S. Treasury. —Alison A. Nieder
