CIT Group’s Liquidity Crisis May Hit Smaller Apparel Firms

NEW YORK—CIT Group, a major source of financing to many firms in the retail and apparel business, is facing a liquidity crisis that has it in talks with Congress and federal regulators.

According to industry sources, CIT has gone so far as to retain a law firm to begin a possible bankruptcy filing. The lender is trying to convince the FDIC to let it in on the Temporary Liquidity Guarantee Program, even as it explores other options. Those other options, the lender said, include “the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank.” Such a transfer would help CIT’s liquidity.

CIT Group declined to add to its initial statement.

According to documents obtained by Bloomberg News, as many as 760 manufacturers and 300,000 retailers would be hit by a CIT bankruptcy.

CIT Group got $2.3 billion in federal bailout money late last year, and some observers worry that the government will be reluctant to give them more. U.S. Treasury Secretary Timothy Geithner talked to reporters at a press conference in London. His statement, while vague, has been interpreted as a sign of hope. “I am actually pretty confident in that context that we have the authority and the ability to make sensible choices,” Geithner said. “We have a significant interest generally in trying to make sure the financial system gets through this, adjusts where it needs to adjust and emerges stronger.”

CIT’s ability to stay liquid affects the apparel industry in a number of ways. Factors work with CIT Group on credit and receivables, and also for funding in general. “I don’t think this is going to have much of an affect on a well-financed, large retailer or vendor,” said apparel industry consultant Fred Rosenfeld. However, “almost all of the small and medium-sized companies that make up the bulk of the apparel business are going to have a huge issue because the funding will virtually dry up [if CIT Group files for bankruptcy]. The factoring community is re-examining every single agreement in place.”

This could even have a negative impact on large department stores that deal with factored vendors.

What will happen next? Rosenfeld says there are many possibilities. After bailing out many large financial institutions, there is a danger that the government might decide to stop. “Another possible scenario is [for regulators to say] that heart of American business is small and medium-sized companies, so how could anyone withdraw their funding?”

Rosenthal & Rosenthal, a large privately held factor, did not return requests for comment as of this writing.