CIT Factoring Clients Have Options

Factoring clients of CIT Group Inc. are being given the option of signing deferred purchase agreements as a precaution.

Factoring clients of CIT Group Inc. are being given the option of signing deferred purchase agreements as a precaution to protect their accounts, financial sources said.

This story first appeared in the August 13, 2009 issue of WWD.  Subscribe Today.

Typically, when factors collect on behalf of client accounts, they first take title to the invoices. That’s the subject of a debate over who — the clients or CIT — would own the collected funds in the event of a bankruptcy. With a deferred purchase agreement, the clients would retain title to the funds even though CIT is making the collection requests. CIT executives declined comment.

The new agreements that are signed would supersede existing client agreements, one factor not connected with CIT said.

Gary Wassner, president of factoring firm Hilldun Factors, said, “This is a viable way of dealing with the uncertainty that’s there and it eliminates a lot of the concerns if CIT has to file.”

Sources familiar with CIT’s operations said that, in the event of a CIT bankruptcy, it would be the holding company that files, while operating units such as the factoring division would not be included in the filing. The rationale, they said, was that it would be easier to sell the factoring operation if it was not entangled in a bankruptcy. That’s because bankruptcy court supervision and a required auction process would limit CIT’s flexibility in any sale.

Potential buyers are already eyeing CIT’s factoring business, including, according to financial sources, J.P. Morgan Chase, W.L. Ross & Co. and GMAC Financial Services. A joint venture bid from Warren Buffett’s Berkshire Hathaway and Leucadia National also is said to be a possibility.

Michael Appel, managing director of Quest Turnaround Advisors, doesn’t expect an immediate CIT bankruptcy filing, despite a disclosure to the Securities and Exchange Commission Tuesday that acknowledged one is possible if it is unable to complete its tender offer this Friday. “Those statements are required, and it’s a way to put bondholders on notice,” he said.

“There are a lot of complex negotiations going on involving lots of parties,” Appel said.

In the SEC filing, CIT said it was in negotiations with bondholders and that, while a possibility, it did not intend to seek relief under the U.S. bankruptcy code.

Still, Appel’s upset the federal government hasn’t done anything to help CIT.

“That annoys me,” Appel said. “If CIT has to file, what will the companies and retailers do? There will be no merchandise on the shelves. I don’t think the government gets it.”