CIT Group Inc., a significant lender to small and medium-size businesses in the retail industry, could be forced into bankruptcy proceedings barring a last-minute deal to renegotiate its sizeable debt load. A bankruptcy threatens to disrupt the flow of merchandise between retailers and their vendors as both gear up for the crucial holiday season.
The Wall Street Journal reported that CIT has $2.7 billion in debt that comes due this year. Sources indicated drawdowns were about $500 million on Monday, but by Tuesday had risen to around $750 million.
CIT Group Inc. last Wednesday said it had been told there is “no appreciable likelihood” of a government bailout in the near term to help alleviate its situation, and was evaluating alternatives for the company.
Both the National Retail Federation (NRF) and the American Apparel & Footwear Association (AAFA) sent letters to financial regulators, saying failure of the major lender could have severe consequences for the retail industry and the nation's economy.
When stores place orders for merchandise, they typically have two to three months to pay for the goods. For a fee, suppliers sell those receivables over to lenders such as CIT — the process known as factoring — to gain cash upfront to produce merchandise. The factor assumes the responsibility for payment of those invoices.
The AAFA noted that CIT represents 60% of factoring in the U.S. apparel and footwear industry and a disruption caused by a bankruptcy filing could have “a crippling impact” on credit approval for vendors as well as the loss of funding to make payments to overseas manufacturing facilities. Smaller retailers are especially expected to get squeezed if the liquidity provided by CIT dries up.
But the government indicated that a bankruptcy by CIT was not seen as a systemic risk to the financial system to merit a buyout. Other lenders including JPMorgan Chase & Co or Deutsche Bank AG are expected to be able to take on many of the same loans in which CIT specializes.
