CIT Group Inc. has expanded its factoring relationship with LF USA Inc. to include Wear Me Apparel, which is expected to provide $700 million in additional annual factored volume for CIT’s trade finance unit.
The new account is the largest announced transaction for the factoring division since CIT Group filed for Chapter 11 bankruptcy court protection on Nov. 1 in the form of a prepackaged petition. The financial services firm exited bankruptcy court proceedings on Dec. 10. The factoring arm, which does about $4 billion in annual volume, is one of the firm’s more profitable operations.
Wear Me Apparel, which does business as Kids Headquarters, was acquired by Li & Fung Ltd. in October. The deal’s structure had the Hong Kong-based firm making an up-front $100 million cash payment plus performance payments over the next five years, with the total payment not to exceed $401.8 million. Wear Me, which targets the young men’s and children’s markets, became the sixth operating division under LF USA.
Wear Me’s 2008 sales were about $700 million, and the majority of its volume was derived through sales of licensed products through arrangements with brands including Calvin Klein, Timberland, Rocawear, U.S. Polo Association and Disney.
According to John Daly, president of CIT Trade Finance, Wear Me was not a client prior to its acquisition by Li & Fung, although the factoring firm has had LF USA as a client for more than six years.
“This is a good piece of business for us. They’re happy with the acquisition. Both of us think we have a long future together,” Daly said.
Rick Darling, president of LF USA, said given the existing relationship with CIT, “it was natural that we would move the factoring business to CIT. We know first-hand the level of service and expertise that CIT offers and the expansion of our relationship reflects our confidence in the services they provide.”
The $700 million in added volume to the trade finance operation is substantial, and Daly was confident the sizable transaction wouldn’t impact other clients. He also didn’t think it would limit the firm’s availability in terms of signing on new clients.
“There is no crowding-out effect. If we had a new piece of business come to us and it could [possibly] overwhelm some lines of credit, we probably wouldn’t do it. We’re not going to [allow] too much pressure on any one situation to impact existing clients,” he said.
CIT’s factoring arm — some refer to it as the company’s crown jewel — is a substantial player in the trade finance community, particularly in the retail and apparel sectors. It provides factoring and credit protection services to consumer product companies. Some firms, such as LF USA and Tharanco Group, are longtime clients and stayed loyal to the factoring firm when its parent encountered financial difficulties that severely jeopardized its solvency last summer.
Financial difficulties involving CIT Group surfaced in July. Even through that tough period, the parent was quick to ensure vendors the factoring arm had the money to fund clients’ needs.
In August, the parent earmarked $1 billion from a $3 billion loan facility provided by a group of CIT’s major bondholders to the factoring operation.
And since only the parent was immersed in bankruptcy proceedings and not any of its operating divisions, Trade Finance has been able to focus solely on servicing existing clients and signing on new ones.
Daly was upbeat about the trade finance unit’s business opportunities in 2010: “In general, our clients seem to be doing pretty well. Many are planning on expanding their business this year.”
He attributed the improvements in business among apparel firms to the recent efforts of companies in getting their expenses and inventory levels under control.
“They’re running their businesses very carefully, and they’re not taking excessive risk in merchandise,” he said.
Based on what he’s seen from client accounts, Daly said retailers are “planning orders up in 2010 from 2009.”
For now, Daly said the economy is fairly stable, although a future concern that is starting to weigh on “people’s minds is what impact increased taxes and interest [rates] would have on consumer spending.”
Daly said his division has picked up additional business in the first quarter. The majority has come from existing clients with new or additional businesses.
Asked about the creditworthiness of companies looking for financing, he said CIT has continued to conduct the same, intensive evaluations of prospective new clients and which ones can be added to its portfolio.
“We’re focused on making sure we get it right in the beginning,” Daly said.
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