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Apparel Industry Concerned Over CIT Group’s Financial Woes

By: Harry Sheff

November 02, 2009

NEW YORK—CIT Group’s bankruptcy filing yesterday has worried the apparel industry, which relies heavily on the firm’s factoring division.

CIT Group has spun the filing as a “short-term hospital stay” that will not disrupt the company’s regular operations. But CIT’s filing listed $71 billion in assets and $64.9 billion in debts, and many of its creditors will not be repaid. Taxpayers, for example, will not see the $2.3 billion federal bailout money granted to CIT late last year.

The good news, say experts, is that CIT’s factoring arm, which is a subsidiary that is technically not a part of the parent company’s bankruptcy, is healthy. “The CIT factoring division is a very well-run business,” says Andrew Jassin of The Jassin-O'Rourke Group. “Unfortunately, it’s encapsulated under a company that has some issues. It would be a wonderful acquisition for any financial services company.”

But the greater company’s woes may hit the subsidiaries, and by extension, the apparel business. “Under no circumstances is this good for the industry,” said consultant Fred Rosenfeld. While big vendors like VF, Warnaco, Oxford and Liz Claiborne and the biggest retailers that work with them probably won’t be hit by CIT’s problems, small and mid-sized vendors and retailers likely will. Weaker vendors will be especially vulnerable, says Rosenfeld.

Factors act as middlemen, guaranteeing shipments to retailers and payment to vendors. CIT is the largest factor in the apparel business: it may be twice as large as all of its competitors combined. “There’s Rosenthal, GMAC, Wells Fargo and the other two or three factoring companies, but they don’t have the capacity to absorb all the prospective clients that would be there if CIT would let them go,” explains Jassin. But, he adds, many of CIT’s clients are locked into contracts anyway.

Most experts agree that the holiday season won’t be affected by CIT’s bankruptcy—most of the season’s merchandise has been shipped already. But come spring, if CIT can’t guarantee orders, manufacturers may not have the cash to make their products, and struggling retailers will be stuck in the position of dealing directly with equally desperate vendors.

Jassin explains: “Those people who are the factoring clients, who would borrow against confirmed orders or borrow against inventory, would have some serious issues: one is that the order size has gotten smaller. Issue two is the inventories they have that are unsold are being sold at lower and lower prices. Three, smaller retailers, the mom-and-pop stores across America which live from one season to the next are not as credit-worthy as they were before. A lot of those retailers use credit cards or personal debt to buy goods from the supply chain. Therein lies one of the big problems: the smallest retailers are not really considered to be credit-worthy, which shifts a lot of the burden of taking on those clients to the suppliers.”

Who in the retail world is the most vulnerable? “The retailers that have had less than stellar results, are rumored to be cash-poor or are more general merchants may in fact have problems,” continues Jassin. “Smaller undercapitalized independent retailers who don’t have strong balance sheets are definitely going to be in for a rude awakening, and their purchasing power may be more about their own personal finances going forward than their balance sheets.”

The first day hearing in United States Bankruptcy Judge for the Southern District of New York is scheduled for tomorrow, November 3, under Judge Allan L. Gropper.

 

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