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government-trade

CIT Said in $3B Deal to Stave Off Ch. 11

A worst-case scenario appeared to have been avoided late Sunday as CIT Group Inc. was reported to have reached a tentative $3 billion deal with bondholders.

A worst-case scenario appeared to have been avoided late Sunday as CIT Group Inc. was reported to have reached a tentative $3 billion financing deal with bondholders, allowing the entire apparel supply chain to breathe a large sigh of relief.


News of the deal — the most welcome about CIT in more than a week — allowed suppliers and retailers a respite as they sought to cope with the potentially catastrophic effects a CIT bankruptcy would have had on the shipment of fall and holiday goods by vendors, as well as the day-to-day credit requirements of many stores. An attempt by CIT last week to secure a second round of federal financing ended in failure.

With CIT’s fate uncertain as the weekend began, many small and midsized companies continued to work on contingency plans, reaching out to other lenders. Others simply were hoping to get paid for shipments and not end up as unsecured creditors to the commercial lender. Even with bridge financing in place, vendors and retailers that were CIT clients are likely to continue to explore their options this week, which could place further pressure on the beleaguered lender.

Late Sunday, CIT was reported to have reached a $3 billion financing deal with key bondholders, including Pimco, Oaktree Capital Management and Centerbridge Silver Point, according to The Wall Street Journal. CIT had been in talks for a $2 billion to $3 billion deal throughout the weekend and at the same time was talking to major banks about debtor-in-possession financing in the event of a Chapter 11 bankruptcy filing.

A CIT spokesman did not return calls for comment late Sunday.

A CIT bankruptcy — which could have come as early as Monday if a deal hadn’t been reached — could have had a far-reaching impact on the apparel industry. The 101-year-old lender accounts for an estimated 60 percent of the fashion industry’s factoring volume and lent the industry about $4 billion last year.

Although best known as a factor for manufacturers, its activities reach well beyond Seventh Avenue. In addition to guaranteeing payment for shipments by 2,000 vendors who sell to 330,000 retailers across multiple industries, CIT also lends money to smaller firms. CIT’s woes cast a shadow over the fashion industry last week as many companies wondered if they could get out of their financing deals with the lender and if they would be able to pay employees or even stay in business.

The financing deal puts the CIT crisis on hold — but doesn’t solve it.

“We’re in unchartered territories,” said Monica Forman, president of Magaschoni, which uses CIT for collection and credit checking. “I don’t think a lot of people can survive any more hits. We are looking at all the laws that govern the contracts. We’re trying to best understand what’s legally allowed.”

CIT’s difficulties have rippled up and down every link of the supply chain.

“Everyone is tied to CIT,” said Bud Konheim, president and chief executive officer of Nicole Miller. “We don’t bank with them, but we write checks to CIT every day because our suppliers are banked by CIT. When a fabric or trim maker gets ready to ship his customer, he gets approval from CIT, turns his invoice over to CIT and gets paid the amount of the invoice from CIT.”

Some could have nowhere else to turn for financing if CIT were to fail.

“It’s not a coincidence that a large portion of the industry does business with CIT,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition, which represents U.S. textile producers. “It’s generally a function of the fact that they haven’t been able to get credit from other sources.”

Tharanco Group, a holding company with apparel brands, notified retail partners it was placing a 48- to 72-hour hold on shipments. “We are pretty hopeful that they can spin [the factoring unit] off, sell it or raise the funding they need,” said ceo Haresh Tharani.

“We’re in a wait-and-see holding pattern,” said CIT client Victor Rousso, ceo of Rousso Apparel Group, which produces Oleg Cassini casual activewear. “We are shipping and have not held back in bringing merchandise to our customers. We’ve spoken to a number of factors and have financing lined up if [we need to] get out of the CIT agreements. We like to make clothes. These days, we’re [spending more time] with attorneys and accountants.”

Jack Wu, founder and ceo of Rainforest, said his apparel company was assured by CIT it would not be damaged. Rainforest has not altered its shipping or sought alternative factors, Wu said. “Even if they go bankrupt, they can continue to operate,” he said. “There’s no sense in looking for another factoring option now.”

Before the apparent deal was struck, CIT spent the weekend weighing its options and meeting with bondholders as well as possible suitors. The company received $2.33 billion in federal funds in December, but, after being denied federal financing this month, explored a short-term bridge loan even as it negotiated for debtor-in-possession financing with major banks including Goldman, Sachs & Co. and J.P. Morgan Chase in the event that a bankruptcy was necessary, according to reports.

CIT’s stock fell 75 percent in the immediate aftermath of the government’s decision, but investors betting the lender would pull through, drove the stock back up 29 cents Friday to 70 cents.

Thirty-two trade associations, including the Council of Fashion Designers of America, the American Apparel & Footwear Association, the Footwear Distributors & Retailers of America and the three major retail lobbying groups, sent a letter to Treasury Secretary Timothy Geithner on Friday urging the administration to reconsider assisting CIT and highlighting its importance to the U.S. apparel business and dramatizing the possible impact of a bankruptcy.

“Uncertainties over CIT have already provoked a credit squeeze that threatens payments and payrolls in thousands of businesses,” the letter said. “As this uncertainty persists, and if CIT is forced to undertake a bankruptcy filing, the ripple effect will be felt in every city and state across this country as the further tightening of credit markets will make it incredibly difficult, if not impossible, for many of the companies, who currently rely on CIT for financing, to remain in business.”

Financial sources said one option for New York-based CIT — if the latest agreement doesn’t in the end stave off a bankruptcy — would be to put the holding company into Chapter 11 protection but not its subsidiaries, keeping the factoring arm afloat. The strategy would allow customers to continue to operate their businesses without the interruption of financing agreements already in place.

In addition, the value of the operating divisions, such as the profitable factoring business, could be preserved for a sale to a new owner, said Henry Condell, bankruptcy attorney at Phillips Nizer.

“The holding company owns the stock of the operating subsidiary, which can be sold, and a bankrupt holding company would then just need bankruptcy court approval to sell the stock [of the division being sold],” Condell said.

Factories around the world and their suppliers could be imperiled if CIT and all its constituent parts go under.

“It’s going to have a ripple effect globally,” said Hana Ben-Shabat, partner in the retail practice at A.T. Kearney. “If CIT disappears from the picture, you have different options. You can go to your bank and ask for credit…or you can tell the retailer, ‘Look, in order for me to keep running my small factory in Bangladesh, you need to pay me for my delivery [immediately].’”

For many, financial arrangements are poised to change — and rapidly.

Jerry Reisman, a partner at the law firm of Reisman, Peirez and Reisman, said, “The most difficult part of this is making every effort to place these [clients] with new factors.…It’s our position that CIT has breached their agreement by putting [the clients] in a perilous position,” he said, noting the other factoring companies can’t handle the load of inquiries they’re receiving.

“One factor called me eight times today,” he said Friday. “They’re moving quickly, but it will take time to do due diligence.”

Credit markets froze during Wall Street’s implosion last fall and have yet to fully recover. CIT and other lenders had tightened up terms, making it harder to get everything from seed money to collateral-backed loans. And fashion has in some ways become less attractive as frugal consumers make fewer shopping trips and demand lower prices.

Many companies had already backed away or been turned down by the lender, which remains the industry’s largest factor despite declines in factoring volume.

“They were way too big and impossible to deal with,” said Warren Donner, president of WD-NY, which stopped using CIT in April. “We were too small for [CIT]. I think they were forcing out a lot of people. It’s really difficult to put your hands in the livelihood of the retailer without having [financial] backing.”

As the crisis unfolded and rippled across the fashion world, there remained plenty of unanswered legal questions surrounding CIT and its customers.

Abe Chehebar, president and ceo, Accessory Network Group, wondered what happens with shipments going out this week and how they can be billed.

“CIT has a lien on inventory for all its companies,” he said. “Can companies ship out merchandise and bill stores directly, bypassing CIT? Is that legal or not? I don’t know, but to continue to give invoices to CIT and not get funding is also an impossible situation.…I think having the government get involved in CIT is more logical than other firms they’ve been involved with [in the financial sector]. These are people who really need it. We’re talking about the entire industry in apparel, footwear and accessories.”

Even retailers that don’t have a direct connection to CIT would be vulnerable if the company were to fail, and questions persist in the aftermath of the reported financing deal.

Trey Kraus, owner of the Rehoboth Beach, Del., specialty store Carltons, said consolidation in the factoring industry might hurt his business since a lender will only accept so much exposure to any one retailer. If more of his vendors switch to the same factor, he said, “They’re not going to give me X plus Y. They’re going to hold it to X, and once I hit that number, they won’t ship me.”

Richard Leeds, chairman of intimate apparel firm Richard Leeds International, said CIT is getting what it deserves, despite the impact on the industry.

“CIT…pleaded for federal assistance, which they were given, and now want the hard-working taxpayers to bail them out further of their continued investment stupidity and greed,” he said. “Taxpayers have invested more than enough to the major lending institutions. We do not need to spread thin government oversight and regulation.”

The government is generally loathe to bail firms out of their liquidity problems, because such rescues can create the sense of an ever-present financial safety net and encourage risk-taking. That said, Citigroup, American International Group and Detroit automakers have all gotten infusions of billions of dollars since the start of the financial meltdown.

But the ramifications of a large bankruptcy can be hard to gauge. In September, investment bank Lehman Brothers was allowed to fail, and the interconnected nature of its business almost dragged down banks around the world, bringing credit markets to a halt and sending stocks into a tailspin.