By  on January 31, 2012

NEW YORK — It’s déjà vu for CIT Group Inc. and Sears Holdings Corp. as the commercial financing firm plans to stop approvals for vendors shipping to Sears starting today.

Several sources on Tuesday confirmed the conversations CIT has had with its vendors. A spokesman for Sears declined comment, while a spokesman for CIT said, “We do not comment on specific customers.”

According to sources, CIT could decide to check orders again if it is able to get the updated financial information it was seeking on Tuesday.

One source familiar with Sears’ business said the outstanding transactions involving vendors who get their financing from CIT has a value of less than $200 million. Sears carries an overall inventory value of between $8 billion and $10 billion, the source said.

Retail and financial sources said CIT is the only factor that has officially stopped approvals. A few others have let factored lines expire since they weren’t being used, said some factoring executives. These executives declined to identify the factoring firms involved.

Shares of Sears fell 4.3 percent, or $1.89, to $42.14 in over-the-counter trading Tuesday as word of CIT’s plan leaked out on the same day the commercial lender posted fourth-quarter results.

CIT said fourth-quarter income for the three months ended Dec. 31 fell 59.3 percent to $33.9 million, or 17 cents a diluted share, from $83.2 million, or 41 cents, a year ago.

John A. Thain, chairman and chief executive officer, said in the conference call that the firm’s “credit metrics improved across the board.” He added that the factoring volume, which is referred to as CIT’s trade finance division, was up slightly for the quarter at $6.9 billion.

Scott T. Parker, chief financial officer, said during the call that CIT’s annual growth in factoring is 2 percent. “Overall, [trade finance] portfolio quality is solid, and we remain very disciplined and proactive with respect to managing our exposures,” he told Wall Street analysts.

The trade finance division posted $8.6 million in pretax income for the quarter, compared with $4.3 million in the year-ago quarter. That $8.6 million was down from the pretax income of $11 million for the third quarter ended Sept. 30. CIT said, “The sequential decline is primarily due to lower factoring commissions and recoveries.”

Factors in general always want as much information as they can get to cut down on the risk to their client accounts and consequently their own overall portfolios.

One factoring executive said recently he advised his client, who was about to cut an order for Sears, to wait to see if better terms could be had to cut the risk of late or even nonpayment should the situation deteriorate. That’s even though Sears is currently liquid. One factoring executive whose firm is still approving on a case-by-case basis said factors are pushing for specificity as much as they are for timely disclosure of financial information.

That drill-down in the financials isn’t without risk for Sears. Credit professionals can take the information and do their own extrapolations to determine when a retailer’s luck could run out. With that information, trade financiers could target in advance when they might have to pull the plug on future orders, without necessarily giving the retailer any advance notice even as the retailer is negotiating terms with its own lenders.

Retailers, even under a confidentiality agreement, prefer to control the information flow so they don’t get caught off guard and end up spiraling toward a bankruptcy filing.

So long as factors are approving orders and the time Sears has to pay vendors isn’t tightened, liquidity shouldn’t be a problem as working capital cash flow isn’t likely to become impaired.

Grant Jordan, senior analyst for Wells Fargo Securities on the High Yield Research team, said in a research note earlier this month that if vendors tightened terms to 20 days, it would cost Sears $1.6 billion to $1.8 billion of increased cash for working capital (including domestic and Canada payables). “We believe the company has adequate liquidity to fund this need in the near term, but caution that a year of poor earnings and negative free cash flow could result in a cash crunch going into the holiday season in 2012,” he concluded.

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