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Firms Wait for CIT's Other Shoe to Drop

While some businesses are actively seeking to shift their factoring and commercial credit needs to other providers, other clients of CIT Group — suppliers and their retail customers — so far seem to be taking a wait-and-see stance in the developing financial drama.

But it may be that a Chapter 11 filing is becoming the desired alternative, regardless of the outcome of a floating notes tender offer to CIT's bondholders.

In the early going, CIT warned that the failure of the $1 billion tender — an additional $2 billion was provided in the package last week — could result in a bankruptcy. But within a couple of days that potential shifted as word leaked that some inside the negotiations were pushing for a pre-packaged 11, even if the placement was successful, as a means to restructure roughly $7 billion in secured debt soon to mature and hanging over the company.

"If [the debt offering] doesn't work, my sense is that the impact on the soft goods industry — apparel and home textiles — will be quite large," Welspun USA evp and chief operating officer Charles Gaenslen told HTT. "It will produce major uncertainty so there will be some turmoil in the marketplace. And anyone who has to scramble to get financing under duress, so to speak, they're going to have trouble, especially if they're in a weakened condition already."

Gaenslen said his firm was tracking the situation closely, despite its limited exposure. "We don't finance, but for a small percentage of our receivables we have them cover us on a credit insurance basis," he said.

Still in play for the trade are some of the goods for the back-to-school season and a good portion of the fourth quarter's holiday shipments. Skittish retailers are already managing intentionally thin inventories; if the financial giant goes into bankruptcy it could hamper the movement of goods through the pipeline.

In terms of CIT's $43 billion factoring and $17.2 billion credit insurance businesses — both of which are used extensively in the home textiles and retail trades — CIT's share of market far outstrips the next two firms, Wells Fargo and Rosenthal & Rosenthal. Executives have pondered what happens if that excess volume can't be absorbed by the other companies. Will businesses fail? Or will they more jealously guard their cash flow and effectively self insure their credit risks?

"The issue is that CIT is, by far, the dominant player in the industry, so for the factoring community the challenge is: if it does indeed fail, how would we collectively absorb all that volume?" said Michael Stanley, managing director of Rosenthal's factoring unit.

"There's nothing really we can do. We have to sit back. There are some challenges with respect to taking on new clients. Why? Because of the security interest issues, the indemnification issues — if it does go into bankruptcy, how a bankruptcy court will treat preference payments. The normal and customary things that factors do, now it's going to be different in a legal venue, where we're not certain how those indemnification arrangements will play out."

Yet, even with those weighty considerations, Stanley managed to inject some levity. How will he deal with it all? "I'm going on vacation," he quipped, making the point that there's really not much else to be done — the circumstances will dictate Rosenthal's response.

CIT's notes, which mature Aug. 17, are part of the overall $3 billion deal to give the financial giant breathing room after the federal government rejected its bids for a bailout. The government's message was clear: CIT is not too big to fail, despite the plea by 32 major trade associations to treasury secretary Timothy Geithner.

"We are writing to impress upon you the very severe ramifications that a CIT bankruptcy would have on more than one million small- and medium-sized businesses, their partners in the U.S. retail industry and the manufacturers and service providers that supply that sector," the letter stated. Among the signers: the National Retail Federation, National Council of Textile Organizations, National Textile Association, Southern Textile Association and the U.S. Association of Importers of Textiles and Apparel (USA-ITA).

It did no good, and CIT's bondholders worked out the interim deal, but apparently not the questions surrounding the firm's short-term future. These scenarios don't address the potential of a forced bankruptcy should the offering fail to be fully subscribed.

Factoring is a "well-managed operation within a troubled company," offered Emanual Weintraub, president and ceo of consultantcy Emanual Weintraub Associates, Englewood Cliffs, N.J. "The retail world will not come to a halt because not everyone is borrowing from CIT, and there are solid companies out there. I don't think anybody has a real clue."

Moreover, there would be substantial differences in a true pre-pack bankruptcy, with solid financing and a quick debt-free emergence, versus a failed offering where there was little choice but to file with debtor-in-possession difficult to find. In either instance, CIT is also said to be considering the sale of several of its business units. Commercial credit and factoring were not among those mentioned for now.

"We're watching it very closely; it affects a number of our customers in different businesses," said Dan Schecter, executive vp of Carpenter Co. "In terms of our plans, I think we have to wait and see exactly what happens. It has a huge ripple effect, not only for large retailers and companies, but also for small ones."

Being reactive could work out, Rosenthal's Stanley suggested. While there is an extensive underwriting process, it can move quickly — not within months, but perhaps days and weeks.

"Frankly, we were hoping against hope that it wouldn't happen this way," he said. "This is not good for the industry, and it's not good for the factoring community. And there are certain very leveraged retailers that are very dependent on factor support that could be impacted by this."

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