Vendors can perhaps breathe a little easier over CIT.
The group’s profitable factoring business, Trade Finance, on Friday got a boost when $1 billion was earmarked to fund the operation, a move aimed at proving to vendors that CIT has the money to fund clients’ needs.
One source said that of the $3 billion loan facility provided by a group of CIT’s major bondholders, $2 billion was made available on July 20 and the final $1 billion was made available on Friday. The parent in turn is earmarking $1 billion for its factoring arm.
In a letter to clients, John Daly, president of Trade Finance, wrote that “CIT Trade Finance is one of the nation’s oldest providers of factoring and financing services. The companies that have placed their confidence in us — our clients — range from family-owned and -operated manufacturers to global publicly traded corporations.…To demonstrate our parent company’s commitment to support CIT Trade Finance and our clients, CIT Group Inc. has provided $1 billion of the proceeds from its recently announced financing to CIT Trade Finance. These funds are in addition to other available funding. We believe we have sufficient liquidity to meet our obligations and our clients’ needs while our parent company implements its restructuring plan.”
CIT Trade Finance “remains open for business. We are actively reaching out to and working with our clients to ensure they continue to access our services needed to run their business. Credit is being checked, invoices are being collected and funds are being remitted,” Daly emphasized.
“This definitely relieves their customers’ concerns that CIT doesn’t have the cash to continue to support them. The factoring group is now able to pay on all of the collections and claims that come in as part of the normal course of business,” said Gary Wassner, president of Hilldun Factors, who has been vocal on behalf of the Council of Fashion Designers of America about the need for federal government intervention to save CIT because of its importance to the fashion and retail industries.
Wassner said the $1 billion also alleviates some pressure in the financial market in recent weeks. “We’ve learned that there isn’t enough capacity in the market to replace CIT. That’s not good for anybody,” he said.
News of CIT Group’s financial troubles first surfaced on July 10, culminating on July 15 when word was received that negotiations with federal agencies about additional government aid had ceased. The company has debt maturing this month, and there was concern it would be unable to raise capital through private bond sales. In a frantic struggle to stay afloat and avoid a bankruptcy filing, it was able to negotiate a $3 billion bailout plan with bondholders. In a broader recapitalization move, CIT also is offering a cash tender offer of the notes due Aug. 17. There’s still a concern financial pressures will continue if not all bondholders tender their August notes. Moreover, CIT also has more than $5 billion in unsecured debt coming due by March 31.
CIT received $2.3 billion in Trouble Assets Relief Program funds in December, when it also got Federal Reserve approval to become a bank holding company.
In recent weeks, some factoring firms, accountants and lawyers have said they’ve received calls from CIT Trade Finance clients trying to determine their options in case CIT has more financial troubles ahead.
Haresh Tharani, chief executive officer of Tharanco Group, said his firm is one that did not look elsewhere for alternate financing. He called the news of the $1 billion infusion “fantastic.”
“This shows that no matter what, the factoring arm of the business will stay. It will succeed.…This keeps the factoring company out of harm’s way and helps preserve the value of the CIT factoring brand,” he added.
“The fact that the parent company is funding CIT factoring means they believe its a viable concern,” said Victor Rousso, ceo of the Rousso Group. “I really have no idea what it means to them liquiditywise, and if it’s enough cash to carry them. CIT has continued to fund us and, for now, it’s business as usual. We look forward to a more solid clarification of their financial structure and liquidity as we move into the Christmas season.”
Monica Forman, president of Magaschoni, which uses CIT for collection and credit checking, said, “We’re thrilled they’re getting an infusion of cash and that the [parent] company has made plans to make it stronger. We’re shipping and I feel more confident. We’re trying to be strategic with what the system allows us to do. We’re watching it very carefully every day.”
Wassner, concerned about the turmoil, said Hilldun on Thursday entered into an additional refactoring agreement with BB&T Commercial Finance, a division of BB&T Bank. Hilldun will continue to use CIT Group Commercial Services as a source of credit approvals.
He pointed out that the additional financing will give “CIT factors plenty of operating capital for the short term, and maybe slow down the exodus of customers.”
“I would think that CIT has probably lost or is starting to lose some clients, which is why there are less dollars going in,” said Lonnie Kane, president of the 30-year-old Karen Kane women’s sportswear brand. “Also, I am pretty sure they are not picking up new clients. I can’t imagine anyone changing their habits until the total issue is solved, and having the parent company adding $1 billion isn’t fixing the overall problem. All it is is a short-term loan to tide them over. They are getting $1 billion from a parent company who can’t afford to give it to them,” said Kane. “There’s still a lot to be done. I’m not cheering yet.”
Jerry Reisman, a partner at the law firm Reisman, Peirez and Reisman, said of the funding: “It’s fantastic that it’s being done. It will give comfort to the apparel industry. Nevertheless, all our clients are asking to terminate their arrangements with CIT, modify their arrangements and try to find an exit strategy.”
He said he’s coming up with various ways in which CIT is in breach of their contract. He said CIT only talks about defaults on the client side, but not a breach on CIT’s part.
“They didn’t give [clients] availability. They’re all petrified and don’t know what the future is with CIT.”
He said other factoring firms are fighting liquidity problems, as well. “The one everybody is comfortable with is Wells Fargo since they’re a bank which got [Troubled Asset Relief Program] money that’s available,” he said.
He thinks this money will keep CIT going for awhile, but “it’s just a finger in the dike.” He said he got three calls on Friday from “very nervous apparel companies.”
“[The funding] is comforting, but still, vendors are very concerned,” said Reisman.
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