Provided by Gary Wassner for CFDA “From the Experts”
In light of CIT’s recent bankruptcy filing, there are two critical questions that we all need to ask. The first is: has CIT succeeded in reducing its debt to equity ratios enough to be able to borrow competitively when it emerges from Chapter XI? The second is: what assets has CIT pledged to its bondholders and lenders in order to secure the agreements and DIP funding that it has arranged?
Before I clarify the importance of each of these questions, I’d like to state a few things that I’ve yet to see mentioned in any articles on the subject of CIT’s struggle. Hasn’t CIT done exactly what the Obama administration and Shelia Bair requested of it and other companies in similar situations whom the government has denied additional funds to? Hasn’t CIT looked to the private equity market and/or internally to raise equity? All the efforts the Board of Directors made to preserve the company should be commended. The Board attempted to strengthen its balance sheet, under very difficult circumstances, by inducing its debt holders to convert their debt to equity. CIT failed out of court and finally reverted to a pre-packaged Chapter XI bankruptcy to achieve what was asked, and in fact, required of them to survive. They were previously denied further federal funds. What choices remained? So, rather than being bailed out once again, they did what they had to do. This was how the free market functioned prior to TARP and the financial meltdown. Unfortunately, CIT is still at a significant disadvantage going forward since the cost of money that will be funding the Chapter XI in many cases is higher than what CIT earns on the loans it currently has on the books to its customers. That’s the irony of CIT having accomplished this in the manner in which they did, while other companies, considered to be more ‘systemic’ have been able to avail themselves of cheaper federal funds on an ongoing basis, allowing them to be more competitive and giving them an advantage that CIT does not currently have.
So, now if I go back to my original questions, I’ve basically answered the first one. The Bank of America is providing a DIP financing line at 2.5 over prime. That’s a better rate than what Goldman provided during the months since July 2009 until the filing this past weekend, but it is higher than the rate it lends much of its money to its clients. That we can all easily see is a model doomed to failure. If CIT has strengthened its balance sheet enough through the wiping out of stockholder equity and TARP obligations, will the Fed open its lending window to it now? Will it be able to come out of bankruptcy and borrow competitively going forward? Without that ability, how can it reasonably return to profitability?
The second question is just as critical. If you are a client of CIT’s Trade Finance division, have your accounts receivable been pledged as assets of the bankruptcy to the bondholders and/or DIP lenders as collateral? This is a question that should be easy for them to answer since the filings are now public. If they have securitized these assets and in the worst case, the bankruptcy turns into a liquidation, what will that mean to your company?
I am one of the first who has spoken out in support of CIT and who believes that a healthy CIT Trade Finance is crucial to the apparel industry. It is the consummate professional in this industry. It has provided funding to small and mid-size companies that has been flexible and fair, and it has supported the infrastructure of this industry for 100 years. CIT Trade Finance did not dig the hole that it has been dragged into. I hope and believe that CIT will continue to be a force in factoring and finance, regardless of what happens to the other divisions of the Corporation. But it also needs to understand the anxiety that all of this turmoil has caused us in the industry. The management of CIT Trade Finance needs to work with all of us who have critical stakes in their future, as the partners they have always been in the past. Information and transparency is so important when markets are unstable and the road ahead is unclear. CIT should realize the value of the endorsement it has from its clients and attempt to comfort them during this time of crisis as best as it can. The value of CIT Trade Finance lies in its customer base. It shouldn’t look at its clients as adversaries but as vital pieces of the puzzle which will eventually constitute its future. CIT needs to help us all to understand what we gain and what we risk in this regretful and tumultuous situation. Support us all and we will support CIT. Be creative with its clients. Be honest and proactive. Ease our anxieties. Our industry needs this company, but CIT also needs our industry. When we emerge from this crisis, we hope to emerge as partners once again.
If you have any further questions, please feel free to contact Gary via email.