California Apparel News

CIT Group Inc. will file for voluntary bankruptcy with the U.S. Bankruptcy Court for the Southern District of New York after the commercial lender’s board approved CIT’s prepackaged plan of reorganization.

The company hopes to emerge from bankruptcy by the end of the year, according to a statement released by CIT. The company expects the reorganization plan will reduce CIT’s total debt by approximately $10 billion, which should “significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability.”

Recently, CIT announced it had expanded its senior secured credit facility by $4.5 billion, according to a release issued by the New York–based company. Provided by “a diverse group of lenders, including many of the company’s bondholders,” the new tranche is secured by the same assets as an existing $3 billion credit facility and “additional collateral that becomes available as a result of the company’s refinancing of certain existing secured credit facilities.”

In addition, the company struck an agreement with financier and CIT bondholder Carl Icahn, whose Icahn Capital LP will provide an additional $1 billion line of credit, upon which CIT will draw if it needs additional funds beyond the $4.5 billion expansion facility.

According to CIT, “These funds, supplemented by cash generated from operations, will allow us to meet clients’ needs and to satisfy customary obligations associated with the daily operation of its businesses during the confirmation process.” CIT is the largest factor to the apparel industry. “The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small-business and middle-market customers, two sectors that remain vitally important to the U.S. economy,” said Jeffrey M. Peek, chairman and chief executive officer, in the company statement. “This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence.”

The announcement came on Nov. 1 in a statement that said the board reached its decision with “overwhelming support of its debtholders.”

According to the company, about 85 percent of CIT’s eligible debt participated in the vote and 90 percent of those who participated voted in support of the prepackaged plan of reorganization.According to the statement, CIT Group Inc. and CIT Group Funding Co. of Delaware LLC will file for bankruptcy protection, but none of the company’s operating subsidiaries, including Utah-based CIT Bank, will be included in the filings. Under the terms of the plan, “all existing common and preferred stock will be cancelled upon emergence.”

CIT’s factoring unit is not part of the bankruptcy filing of the parent company.

“Parent [companies] file all the time and their subsidiaries are not affected,” said Steven T. Gubner, an attorney with Ezra Brutzkus Gubner LLP in Woodland Hills, Calif. “The costs of putting their operating entities through bankruptcy [would be] astronomical. You’re talking about every particular loan account making advances. It would be absolutely disastrous—both from an operational standpoint and a cost standpoint.”

CIT’s $4.5 billion credit facility could help the company’s factoring unit operate as usual during the reorganization—although credit may remain tight or get tighter in the coming months.

And Gubner said the possibility remains that CIT will sell off some of its subsidiaries, including the factoring unit.

“In these types of situations, it’s not unusual for them to sell off different business units after the parent files,” he said. “The only concern could be that down the road, CIT faces liquidity issues—but those issues always exist. One of the concerns we're seeing is with a new lender coming in with all this new money, there may be more stringent controls on loans that are either in an over-advanced position or are under-collateralized. Whereas in the past, borrowers were able to take funds despite their liquidity, they may not be able to do the same.”

CIT's news came just as the Commercial Finance Association was kicking off its annual convention in Las Vegas. The Commercial Finance Association is a trade group that represents factors and asset-based lenders.

“The Commercial Finance Association is hopeful that CIT’s Chapter 11 filing will result in an orderly process, allowing the company to emerge in a position to continue to support the thousands of small- and medium-sized businesses they have served for years,” said Andrej Suskavcevic, chief executive officer of the association. “It is important to note that the commercial financing industry is a mature, stable and vibrant market sector which is crucial to the global economy. This is evidenced by the steady growth and stability this industry has experienced, even throughout the most recent recession and instability in the credit markets.”

Gregory N. Weisman, an attorney with Silver & Freedman PLC in Los Angeles, sent an e-mail out shortly after the news broke, advising companies that have concerns about the impact of CIT’s bankruptcy filing to contact their attorney.

But so far, Weisman said, there does not appear to be much panic among apparel makers over the news. This is in contrast to July, when CIT’s financial difficulties began to escalate.

“The hiccup four months ago was they quit lending for a couple of days and everyone panicked,” Weisman said. “This is another announcement that could create apprehension in the minds of factoring clients concerned about CIT’s long-term economic viability. Does it have the money to continue funding over the next 60 days? Will it unsaddle itself from all of this debt?”

CIT is promising to continue doing business as usual during the reorganization, and it is unlikely there will be a mass defection from CIT to other lenders.

“People who were skittish largely have already taken off,” Weisman said. “Many businesses have already walked to Wells Fargo Trade Capital and other lenders, but that was a process that started in mid-2008. To CIT’s credit, a lot of its long-term customers have ridden out this turmoil with CIT.”

Weisman warned companies against invoicing directly. “Most contracts provide that CIT owns all the receivables today and tomorrow. Invoices are already assigned. It was done the day they signed [the factoring contract],” he said. Weisman recommended apparel companies factored by CIT contact the commercial lender to find out if there will be any repercussions from the filing. “If they have any apprehension, they should contact their attorney,” he said. “Most CIT contracts are similar but they are not all the same.”—Alison A. Nieder

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