By  on July 23, 2009

For now, CIT has reopened the credit spigot and was back providing advances to clients, according to sources. But the commercial lender said in a regulatory filing Tuesday that a Chapter 11 bankruptcy filing remained a possibility if some bondholders declined to tender their holdings by Aug. 17 and agree to take less than face value for the $1 billion in debt coming due next month.

“It’s a difficult position for our clients to be in,” said Victor Wahba, a partner at accounting firm Weiser LLP. “Sitting tight with CIT makes sense right now, but clients should also assess credit requirements on a long-term basis. They should put together rolling 12-month projections, and maybe even three years out to the extent that they can, looking at peak seasons and what those needs may be. That assessment should be the road map for making decisions on their financing needs.”

Lenders are holding clients up to close scrutiny, which means that when current lines expire, they may ask for more collateral, offer financing at higher rates and even seek personal guarantees in some instances.

Wahba said one option that was prevalent 10 years ago might be making a comeback — have a bank line of credit and work with a factor at the same time.

Saul Berkowitz and Carol Lapidus, partners at the McGladrey & Pullen LLP accounting firm, said they were advising clients to look into either another factor or a credit insurance company. They acknowledged the difficulty in a short time span for all of CIT’s customers to find alternatives.

The chief financial officer of a firm that ended its factoring relationship with CIT, who spoke on condition of anonymity, said, “We didn’t want to risk having our accounts receivable becoming part of a bankruptcy.” The cfo said he had doubts about whether there is enough factoring capacity to absorb what would be lost if CIT were to disappear. For now, the firm will carry its own paper.

The 101-year-old CIT is a financial cornerstone of the fashion world, with an estimated 60 percent of the industry’s factoring volume. CIT loaned fashion companies and retailers about $4 billion last year.

Glen Podhorzer, another partner at Weiser, said one of his apparel clients was seeking a renewal of a $3 million line of credit, but the lender wanted a personal guarantee. The client worked on a 12-month projection and realized the $3 million figure was too high, eventually getting a $1.5 million credit line from the same lender.

Firms also need to keep a watchful eye on their inventory, Podhorzer said.

“Companies should clean it out and convert it to cash,” he said.

In addition, companies should start to eliminate unprofitable businesses if they haven’t done so already.

“Gone are the days of just pumping up volume,” Wahba said. “Companies need to get back to their core business, and then work on developing new product lines. It’s about managed growth versus your customer managing your growth for you.”

These strategies help to lower a firm’s need for capital, which can have a positive impact on credit lines and improve a firm’s relationship with its lender, the experts said.

On the legal advisory side, many attorneys are combing through contracts to see if deals can be renegotiated.

“Factoring agreements were drafted to account for the default of the client, not CIT, and this should be addressed in future agreements,” said Henry Condell of Phillips Nizer’s bankruptcy practice.

His firm is helping clients review factoring contracts with CIT, to determine when clients can end the agreements as well as the possibility of renegotiating renewal terms.

Generally, there are certain notice requirements that must be given to end a contract as well as provisions for termination fees. Those fees, according to sources familiar with the contracts, can run into six figures, particularly when the penalty to end the agreement can cost the equivalent of six months to a year of fees.

One idea worth exploring in a renegotiated contract is to see if clients can arrange to have payments by retail customers go directly to the client as opposed to CIT, Condell said.

The issue centers on what happens to the CIT accounts with credit balances in the event of a CIT bankruptcy. The status of those accounts remains uncertain.

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