CIT Files Prepackaged Bankruptcy
By Staff -- Gifts & Decorative Accessories, 11/2/2009 8:00:00 AM
New York – CIT, major lender to the furniture and retail industries, finally declared bankruptcy on Sunday,
according to the New York Times. CIT filed a prepackaged bankruptcy plan designed to let it reemerge from court protection, owned by its creditors, by the end of the year. It is hoped this will limit damage to the companies that depend on CIT for financing: Many factoring companies have closed, leaving more small and medium-sized businesses dependent on CIT to keep cash flowing. CIT works with about 2,000 vendors who supply 300,000 retailers. According to NJ.com, the bankruptcy comes too late to have a major impact on holiday merchandising, since product is already in stores' distribution centers, but may cause hangups in spring ordering – doubly a problem since retailers are anticipating a rebound in consumer spending in 2010.
The company has been struggling to stay solvent since this summer, with an endless stream of negotiations between CIT, creditors, and even the federal government, which declined to bail out the struggling lender a second time. (CIT received $2.3 billion as part of last fall’s bailout.) Last week, the company got a $4.5 billion loan from several investors, and made a deal with Goldman Sachs to preserve a $2.13 billion loan. CIT tried to stay out of bankruptcy through a bond exchange offer, but the proposal failed to win enough support from bondholders.
About 85 percent of CIT’s bondholders voted on the bankruptcy plan; they were almost unanimously in favor. Bonds make up about $30 million of the company’s nearly $65 million in liabilities. (the company has about $71 million in assets). Bondholders will receive about 70 cents on the dollar owed them through the prepackaged bankruptcy. CIT said investors would have received as little as 6 cents on the dollar in a bankruptcy that lacked a pre-approved reorganization plan.
Only CIT’s holding company is filing for bankruptcy; most operating subsidiaries, including CIT’s Utah bank, will continue to operate normally. The company plans to move more of its operations into its bank instead of relying on the capital markets.
According to Furniture Today, Terry Oelschlaeger, managing director of CIT Commercial Services' Charlotte, NC-based regional office, said his business unit is one of the operating subsidiaries that isn't part of the Chapter 11 filing, is adequately funded and "continues to do business as usual." He oversees the bulk of the company's furniture factoring business. "It hasn't impacted what we do for our clients nor has is impacted what our clients are doing with us," he said. Asked what's next for the factoring business and whether it is likely to be sold by CIT Group, Oelschlaeger declined to comment.
According to Bloomberg, CIT asked U.S. Bankruptcy Judge Robert Gerber for permission to borrow $500 million from Bank of America Corp., who is already CIT’s largest unsecured claim holder as collateral agent for a $7.5 billion claim. Other major creditors include Bank of New York Mellon Corp., as a trustee for retail bonds with a claim of $3.2 billion, Canadian senior unsecured notes with a claim for $2.1 billion, and Citigroup Inc. with a $2.1 billion claim as an administrative agent to bank debt due 2010.
What does this mean for the gift industry? Gifts & Decorative Accessories asked industry experts.
Beth Lang, GHTA board member and owner/president of Alexa's Angels, told us, "Banking problems, such as the recent bankruptcy of CIT, will continue to negatively affect all small, mid and large-size companies in the industry. Most of the companies and retailers in our industry have a lead-with-revenue model that makes it difficult to operate without adequate lines of credit. It is still very important for all of us to stay on guard and consider our lending options, as well as making it a priority to foster our individual banking relationships."
Ron Knutson of SPI, San Francisco, said, "For the short term, I would expect to see a tightening of CIT factoring operations and a real tightening of their financing arm. Higher credit value will likely be the standard, meaning less credit available for firms competing to obtain it. Unfortunately this translates to an absence of credit for the marginal retailers and vendors within the US. I think we will see a small decrease in the number of vendors, but of greater concern could be the loss of more within the ever dwindling retailer base."
“It's clear that CIT is working hard to maintain its important role in lending to small and middle-market businesses. We are still in a tight lending situation in the U.S. CIT's reorganization may mean a previously large lender will be smaller, which will be a force for tighter lending, but forces are at work to improve lending by banks worldwide,” said Frances Gravely, founder and vice president of Vietri. “From Vietri's perspective, we continue to plan for 2010 with expectation of a flat economic year, flat relatively to our 2009 year which will end as a profitable year with ticks upward in our last two quarters. “
(For the complete backstory of CIT's current financial predicament, visit Gifts & Decorative Accessories’ sister publication Furniture Today. To go even further back, visit Reuter's timeline of the company since its 1908 inception.)
According to Furniture Today, a CIT director who oversees the bulk of the company's furniture factoring business said that the Chapter 11 filing of parent holding company CIT Group doesn't affect the factoring business for CIT or its furniture clients.
Terry Oelschlaeger, managing director of CIT Commercial Services' Charlotte, NC-based regional office, said his business unit is one of the operating subsidiaries that isn't part of the Chapter 11 filing, is adequately funded and "continues to do business as usual."
"It hasn't impacted what we do for our clients nor has is impacted what our clients are doing with us," he said. Factors lend to companies based on their accounts receivable.
Asked what's next for the factoring business and whether it is likely to be sold by CIT Group, Oelschlaeger declined to comment.
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