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CIT Group's troubles could weigh heavily on retailers this holiday season

The finance company, which is talking to federal regulators about steps to keep it afloat, is a major cog in making sure that orders get paid for and delivered to stores.

July 15, 2009|Sandra M. Jones

Just as the retail industry is starting to find its footing after the upheaval of the last holiday season, a new storm is brewing.

CIT Group Inc., the giant finance company, disclosed this week that it was talking to federal regulators about steps to keep it afloat.

The New York company's financial troubles could weigh heavily on retailers this holiday season. CIT ranks as one of the nation's biggest providers of factoring services, a practice that keeps goods flowing from manufacturers to retailers.

CIT is a major cog in making sure that orders get paid for and delivered to stores. Without CIT, retail shipments for the crucial holiday shopping season could be in jeopardy and, in turn, set off a new wave of bankruptcies among retailers and vendors.

"At the risk of sounding overly cautious, if the government did not help CIT, we could see significant inventory issues for the holidays," said David Strasser, an analyst at Janney Montgomery Scott in Philadelphia. "Some vendors would simply not be able to finance shipments to retailers for holiday."

Factoring is an old form of finance; some historians trace factoring as far back as ancient Mesopotamia. The factor, or agent, pays the vendor for its accounts receivable. If the retailer doesn't pay for the goods, the factor assumes the responsibility to pay the vendor.

Vendors that sell to Wal-Mart Stores Inc. and Target Corp. as well as to smaller independent retailers rely on CIT for factoring services.

Most are mid-size manufacturers of apparel, textiles, furniture, home furnishings and electronics that generate less than $50 million in annual sales, according to CIT.

"They are generally not very well capitalized," said Jonathan Lucas, chief sales officer at CIT, in a transcript of a May interview conducted inside the company as part of an financial education series. "They do not have alternative sources of capital. We provide that source of capital."

Most experts agree that without CIT, vendors would have to scramble for funding that is hard to come by in a tight credit market. But there is little consensus on the importance of CIT's role in keeping the supply chain moving.

"We believe that should CIT cease lending, probably a good portion of its lending done to creditworthy clients could be assumed by another bank," CreditSights, a New York research firm, asserted in a report Monday.

CIT generated $42.2 billion in factoring volume in 2008, down from $45 billion in 2007, according to the company's annual report. That is less than 1% of the combined $3.9-trillion retail industry and $5.3-trillion manufacturing industry in the U.S., an amount CreditSights characterizes as "relatively insignificant."

It is unclear what will become of the talks with federal regulators. CIT issued a statement Monday saying it was in "active discussions" with regulators on "a series of measures to improve the company's near-term liquidity position."

Among the options being discussed are CIT's application to participate in the Federal Deposit Insurance Corp.'s temporary liquidity guarantee program, which allows cash-squeezed companies to issue government-backed bonds to raise capital at a lower cost.

The Wall Street Journal reported Tuesday that CIT and regulators were negotiating an aid package that would let CIT move assets to its Utah bank division. CIT would then pledge some of those assets at the Federal Reserve's discount window and would refinance some debt.

In December, CIT received $2.33 billion from the Treasury's Troubled Asset Relief Program

A CIT spokesman declined to comment further.

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smjones@tribune.com

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