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Bondholder Deal Won’t End CIT Troubles

Long-term viability of firm CIT still in doubt after news of $3B deal.

Bondholders pulled the embattled lender CIT Group Inc. back from the brink of insolvency Monday with a $3 billion bailout deal, but the highly indebted company’s fight for long-term survival continues, leaving its vendor and retail clients to worry over future financing.


News of the capital injection, which CIT confirmed late Monday, boosted the firm’s shares on Wall Street. Investors cheered the additional breathing room and pushed the stock up 78.6 percent, or 55 cents, to $1.25 — still well below the $1.64 the stock fetched before the negotiations for a federal bailout failed. (For more on stocks, see page 14.)

The deal gives the company an opportunity to restructure and was more than welcome on Seventh Avenue. Shipments of fall goods were suddenly halted or called into question last week when talks for a second government lifeline for the factor fell through. The company received $2.33 billion in taxpayer money in December under the Troubled Asset Relief Program.

Founded in 1908, CIT accounts for an estimated 60 percent of fashion’s factoring volume and lent the industry roughly $4 billion last year. In addition to guaranteeing payment for shipments by 2,000 vendors to 330,000 retailers, the New York-based firm lends money to smaller retailers, helping them make payroll and cover expenses.

“CIT has merely put its finger in the dike,” said Jerry Reisman, a partner at the law firm Reisman, Peirez and Reisman, of the latest round of financing.

While the deal with bondholders should solve CIT’s immediate liquidity problems, the interest on the loan — said to be about 10.5 percent currently and tied to the London Interbank Offer Rate — was “exorbitant,” according to Reisman. “This is a windfall to the bailout bondholders who could not earn that return elsewhere with little or no risk.”

Reisman has advised clients to look for other financing companies, but noted conditions are still very tight in the credit markets.

“It seems to me that this may be designed to get CIT through a crisis point and then we’ll wait and see what happens,” said Tracy Mullin, president and chief executive officer of the National Retail Federation.

Mullin said an agreement with bondholders would give retailers some breathing room during the back-to-school and holiday shopping seasons.

CIT has more than $5 billion in unsecured debt coming due by March 31 and still faces major hurdles before it is free and clear of its financing woes.

Experts said CIT still has to rid itself of the bad loans sitting on its books and review its funding structure, which depends on public debt.

The financing from CIT bondholders is secured by some of the company’s more attractive assets and is “costly,” wrote CreditSights analysts Adam Steer and David Hendler in a research note.

“From a recovery perspective, we believe the deal is a negative for bondholders as it does not fix the underlying problem and layers in more secured debt,” the analysts said. “Without a viable funding model, we believe CIT may be at risk of filing for bankruptcy even after receiving emergency financing.”

The CIT factoring operation is larger than all the other New York factors combined, according to financial sources familiar with the business. But a sale of the profitable factoring arm might not necessarily be the solution to CIT’s woes.

If the company sold off the profitable assets, such as the factoring and transportation businesses, there might not be much left to sustain CIT as an operating entity, sources said.

In the wake of the CIT turmoil, many in the fashion industry are reevaluating their funding structure, but ultimately might find they have few places to turn in the down economy.

“We’re telling clients with decent credit that if they consider alternative financing with top-tier lenders to be prepared with current financial statements, projections, inventory analysis,” said Glen Podhorzer, a partner at accounting firm Weiser LLP. “If they are seeking alternative financing, they want to be able to expedite the process.”

The accounting firm advised clients to honor their current contracts with CIT, meaning that firms that ship goods under the company’s factoring agreements should not hold back on invoices or ask retailers to pay them directly.

Marc Federbush, partner in charge of the apparel and textile services group at the accounting firm Anchin, Block & Anchin LLP, was telling his clients that use CIT to sit tight for now.

“I think CIT is going to be viable,” he said. “They’re going to continue to be a major player in this industry. I’m advising my clients not to a make any rash decisions.”

Some continued the push for federal involvement. “Clearly the government needs to monitor this and they need to acknowledge that there may be a role that they can play beyond what the bondholders are willing to do to resolve this situation in a more permanent fashion,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition. “It would be irresponsible of the government not to do that.”

Gary Wassner, president of factoring firm Hilldun Factors, pushed for federal assistance for CIT on Monday in a letter written on behalf of the Council of Fashion Designers of America.

“There is no other company who can fill the gap left by an abrupt and disorderly departure of CIT….” wrote Wassner. “Step up to the plate now and give CIT the lifeline it needs to allow for an orderly transition, rather than a chaotic, anxiety-ridden collapse that will cause untold damage to thousands of innocent Americans.”

But so far, the private sector has proved more willing to come to the assistance of CIT, even though the aid is driven by the investors’ own interests.

“If they are able to work this out and make whatever structural changes without having government involvement, that would be ideal for them,” said former Treasury Department official Mark Warren, who was named vice president for tax policy at the Retail Industry Leaders Association last week.

“I would also add that since the government, Treasury and the [Federal Deposit Insurance Corp.] didn’t seem to embrace their request the first time around, I think that putting more pressure to try to get a private sector solution is right,” Warren said.

CIT is led by chairman and ceo Jeffrey Peek, who is expected to stay with the firm. Peek has been criticized for the company’s exposure to subprime mortgages and student loans. The company got out of the risky businesses last year.

Peek’s compensation over the last three years included salary, a bonus and other compensation totaling $6.1 million. Adding in the value of stock and option awards, which might not have been realized given vesting schedules and the company’s declining share price, the ceo’s total compensation topped $28 million for the three years.

CIT agreed to restrictions to executive compensation when it accepted TARP funds in December and said in regulatory filings it was “rethinking our incentive compensation program.”

Accepting the bailout money led to some changes in the Peek household as well. Peek’s wife, Liz, was identified by New York Magazine as the anonymous author of an article in the now-defunct Portfolio magazine titled, “Confessions of a TARP Wife.”

The article, which appeared in the May issue, detailed the trials of being linked to a company that took government funds.

“[B]eing a TARP wife means, in short, making decisions according to a complex algorithm: balancing the need to look like your world hasn’t crumbled beneath you — let’s not alarm the investors! — with the need to appear duly repentant for your subprime sins,” said the article.

The balancing act included sending presents directly to people’s homes to avoid being seen with shopping bags from Bergdorf Goodman.