The pressure is still on at CIT Group Inc.
This story first appeared in the November 3, 2009 issue of WWD. Subscribe Today.
Even with the filing of a prepackaged Chapter 11 bankruptcy petition in Manhattan federal court Sunday, serious questions remain about the lender’s business, which is responsible for about 60 percent of factoring volume to the U.S. apparel industry — including the status of new contracts. And a sale of the factoring unit, considered CIT’s crown jewel, cannot be ruled out.
Gary Wassner, president of Hilldun Factors, said he received some calls on Monday from clients concerned over the long-term viability of CIT under the restructuring plan.
“If you have a contract due for renewal on Dec. 1 before the company is out of bankruptcy, what do you do? You have to know that there’s some place for you to go for financing. The market is still in turmoil,” Wassner said.
And it could remain so even after a successful emergence from bankruptcy. “If the company can’t borrow at proper rates to fund the company after it exits Chapter 11, are we back to the same kind of situation?” Wassner wondered.
He added he didn’t know if CIT’s reduction of $10 billion in unsecured debt is sufficient deleveraging to convince the federal government the company is now eligible for federal funds at a lower rate. If CIT can’t borrow at lower costs, then a sale of the factoring arm might be necessary, Wassner concluded.
Others were more sanguine, especially since most retailers’ and vendors’ holiday needs have been met.
Richard Kestenbaum, an investment banker at Triangle Capital LLC, observed, “It may not be as bad as it sounds because its filing is through a prepackaged restructuring plan, so they have the agreement of creditors. Hopefully CIT’s bankruptcy will go like General Motors’ and they’ll get out fast without any acrimony.”
Kestenbaum believes CIT will try to keep the profitable factoring arm, which lent suppliers about $4 billion last year, until the economy gets better so that if the creditors — or soon-to-be new owners — decide to sell later on they can get a better purchase price for it.
Allan Ellinger, senior managing partner at investment bank MMG Group, has “100 percent confidence that CIT will survive.”
Carl Icahn, who provided $1 billion in debtor-in-possession financing through his Icahn Capital, will get to appoint one member to CIT’s new board, but Ellinger isn’t sure it will make much difference. “It is just one vote on the board among 13, unless he appoints one of the smartest guys in the room and that person has the ability to build consensus,” he said.
Icahn could not be reached for comment.
The filing, in a Manhattan bankruptcy court, is the fifth largest in U.S. history — after Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom Inc. and General Motors Corp. As expected, it was just by the holding company, leaving operations to proceed without interruption.
CIT’s petition listed $71 billion in assets and $64.9 billion in debts. The company said it expects to exit bankruptcy by yearend.
The filing listed Bank of America, which is owed $7.5 billion, as its largest unsecured creditor. CIT said it has over 100,000 creditors, and listed its top 75 unsecured creditors as holding claims valued at $45.3 billion.
One big loser is expected to be the U.S. government, which provided the lender to small- and middle-market firms $2.3 billion under its Troubled Asset Relief Program in exchange for preferred shares and warrants. Those shares could get wiped out, compared with most bondholders who will get new notes valued at 70 cents on the dollar of old debt, plus equity in the restructured firm. CIT has been on bankruptcy watch since July, and has spent the past four months trying to restructure its debt load.
In the disclosure statement filed by CIT in bankruptcy court on Monday, the plan is to “transfer our most bank-like business lending operations, or platforms, to CIT Bank and to have substantially all future originations occur in the bank. Corporate finance, trade finance, vendor finance and small business lending are the business platforms most suitable to operate in CIT Bank.”
The court filing also said if the request to transfer platforms into CIT Bank is unsuccessful, CIT would likely pursue alternative paths — including the sale of businesses. The transfer has to be approved by the federal government, which is already leery of troubled banks. In addition, a sale of operations, even of the core factoring arm, might not be that easy given the current economic environment.
Andrew Jassin, managing director of consulting firm Jassin-O’Rourke Group, said CIT needs to either lower its overhead or reduce the costs of lending in order to survive. He believes clients with existing factoring agreements should be fine, but that new clients, such as small retailers who were hoping to line up new financing agreements, initially might find themselves out of luck.
“It’s a question of whether CIT has the money to lend out to new clients and the risks involved. They are still looking for collateral, and might have to impose tougher lending standards to mitigate their own risks. CIT has to evolve so it is no longer the lender of last resort. Can other lenders pick up the slack? Maybe not for those firms that don’t have great credit,” Jassin concluded.
Saul Berkowitz, partner at the accounting firm McGladrey & Pullen, said right now the filing doesn’t mean anything for existing clients who have contracts in place, although new borrowers might have to wait until capital is in place to be loaned out.
Glen Podhorzer, partner at accounting firm Weiser LLP, said some of his clients had funds in their CIT credit accounts that were drawn down 100 percent in July so they wouldn’t be impacted in case of a bankruptcy filing. The typical allowable draw-down rate is 80 percent. He noted that even though the bankruptcy filing was expected, there’s still some “nervousness over CIT’s ability and capacity to meet funding needs.”
Monica Forman, president of Magaschoni, said that while the CIT bankruptcy had taken her by surprise, “We had projected this could happen and therefore protected ourselves appropriately.” She said that they use CIT for factoring, but “we don’t borrow against it.”
Victor Rousso, chief executive officer of the Rousso Group, said, “Through Friday, we’ve had no problem. We’ve been able to borrow money.” He added the bankruptcy filing “gives the parent company good liquidity now, and according to them, it’s business as usual.”
Deirdre Quinn, president of Lafayette 148, which uses CIT “for everything” said, “We’re fine. It’s really business as usual. We have been with them for a long time. We have a contract and we are not planning to get out of it.”
She said CIT executives had assured her the Chapter 11 filing would have “no effect” on the firm as a client.
Jack Wu, founder of Rainforest, uses CIT only for credit checks and said that “things are operating normally. Hopefully, they will make the company better going forward. We don’t like it but we can operate normally at this point.”
For now, most are just hoping there’s no glitch in the plan for a quick exit from bankruptcy court proceedings.
Gilbert Harrison, chairman of investment bank Financo Inc., concluded, “The filing means that CIT is closer to a potential solution, but clearly there remains lots of uncertainty about the outcome. If you have a CIT dependency then you should have been concerned both before and now after the filing. However, this is a positive step toward potentially saving the business.”