CIT's Collateral Damage

Georgia small businesses brace for the potential loss of a major funding lifeline.

Business to Business
July 24, 2009

The teetering fortunes of troubled commercial lender CIT Group are setting off increasingly urgent alarms for Georgia retailers, and even an 11th hour deal to at least temporarily forestall bankruptcy is bringing scant reassurance for stores and their suppliers waiting for another shoe to drop on their bruised industry.

"I think if CIT goes 'bye-bye,' there are going to be tons of independent (retailers) going 'bye-bye' and several manufacturers going 'bye-bye' too," warns Jeffrey Gardner, owner of Cornerstone Furniture in Atlanta. "CIT is a big part of this business."

"My guess is there are 10,000 to 20,000 retailers in Georgia who would be affected by this," agrees John Heavener, president of the Georgia Retail Association. "And it's not just retail. When sales started to drop, state revenue dropped precipitously. The states and counties now are having budget crunches. Almost 19 percent of workers in Georgia work in retail. It's a link effect to all other parts of the economy."

Strapped by shrinking access to capital, the 101-year old CIT Group called for help last year and received a $2.3 billion federal infusion. But in mid-July, its second appeal for aid was turned down in a move seen as a sign the Obama administration has reached its limits for corporate bailouts. That brought speculation that the company would file for bankruptcy protection in a matter of days.

Appeals from the retail industry have declared the company too important to fail. "I think it would be very, very damaging," Heavener cautions.On July 20, CIT announced it has reached a $3 billion agreement with its bondholders to keep the company afloat, and CEO Jeffrey Peek promised "a restructuring plan that will better position our company for the long term." But observers say the company's long-term outlook is far from hopeful, with CIT needs a daunting $7 billion just to address debts coming due over the next year. "It's a stopgap," grants Heavener. "Everything is stopgap now."

Who is CIT?

Long a source of funding for small and midsized businesses, CIT today stands out most significantly for its role as a financial intermediary between retailers and suppliers in a practice known as "factoring" or "factor financing." When placing an order, retailers often lack the cash to pay for merchandise up front, but manufacturers and vendors need that money for costs such as raw materials, rent, utilities or employees salaries. As a "factor," CIT provides short-term financing to bridge that gap by buying the accounts receivable from the supplier and subsequently taking payment from the retailer.

"A lot of times, they won't even ship you. They won't ship you unless you factor through something like CIT," explains Jimmy Huff, vice president of Atlanta-based Huff Furniture, who factors with CIT for five of his manufacturers.

It's a highly specialized niche, one in which the National Retail Federation says CIT is almost unique, especially now that the other major name in the field, GMAC, has moved away from factoring in the midst its own government bailout. The American Apparel & Footwear association estimates that CIT does 60 percent of the factoring for the U.S. apparel and footwear industries. "CIT is really the one big player," says J. Craig Shearman, vice president of governmental affairs with the National Retail Federation. "There are a bunch of small players, but it's doubtful even whether all of them together are big enough to pick up the slack."

With a 56-year history, Huff believes his company has plenty of credit to weather a possible demise of CIT, but he worries about smaller, entrepreneurial companies with little cash on hand and limited credit, especially in today's lean lending environment. "It probably will affect some of the newer businesses, the startups. They aren't well known. They are needing to get that credit so they can keep doing business."

Domino effect

"It would be just disastrous, another bad thing to happen to the economy" says Diane, not her real name, whose family business in Atlanta factors through CIT Group. "I just think people are not aware of how big, how important they are to the small-business economy."

Diane asked that neither she, nor her company be identified, demonstrating a concern that Shearman says has become common. "Most of the retailers we have spoken to have actually asked us not to use their names because they don't want anything associated with a particular company. They don't want people to think 'oh, there's going to be a shortage of sweaters at such and such a place this year.'"

But shortage is exactly what some industry representatives are predicting if CIT is suddenly removed from the equation, creating a hole in Georgia's supply chain just in time for the industry's critical Christmas shopping season. If already strained retailers must suddenly come up with their own cash, or search the current tight credit markets for alternate sources of credit to buy inventory, Heavener says they will likely simply buy less inventory. "Certainly people would have thinner shelves than normal for the holidays, probably less stock and probably increased prices because of that. We're going to see some retailers not even be open for the holidays – not only not have inventory, but not even be open."

"It's like prepaying for your house," explains Sean Ergle, owner of Area Urban Interiors in Atlanta, who has become all too familiar with the perils of retailing without factoring support. He was cut off by CIT in a payment dispute a year ago and has had to come up with other ways to pay his vendors since. "Retailers cannot survive delivering a prepaid product unless they have tons of capital. We started our business with a couple of thousand dollars and charged up the credit cards, but the debt ... it's a vicious cycle."

It makes it difficult sometimes to explain time lines," Ergle points out. "Normally we can sell something and have it in four to six weeks. So I have to explain to the customer why it's not here. When the customer pays a thousand dollars for something, they want it when they want it."

It's a scenario Camille Sheppard is eager to avoid. Owner of Atlanta apparel supplier Camille and Company, she estimates that fully half of her business is factored through CIT group and she's trying to make contingency plans. "We're going to talk to our banks, talk to our credit cards, see if we can get extensions. We're going to talk to our vendors and see if we can work with them directly."

Georgia retail advocates say they're holding on to cautious hope that, given the newest arrangement with its bondholders, CIT can shore up its finances enough to keep the merchandise flowing, especially as businesses try to strike deals for the holiday season. Says Heavener: "I think that we have a reprieve that may give us some breathing space. I think a long-term solution has yet to be found."

"It's definitely not over," echoes Shearman, who sees the deal buying time for the government to reconsider stepping in. The next critical point for CIT is a tender offer in which it plans to buy back $1 billion of its debt for 82.5 cents on the dollar by August 17. If enough bondholders agree, a major deadline will be defused. If not, the company could be flirting with bankruptcy again in a matter of weeks, and reports on Friday have emerged about breaking up the company to avoid bankruptcy.

"Nothing has been decided yet," says Sheppard. "I don't know if I'm going to have a problem going forward for the fall or not. Right now we're in limbo."