CIT Group has been the big financial story the last few days. The latest news is pretty grim. Bankruptcy appears imminent and "the cost of insuring its debt spiked, its short-dated bonds have plunged, and Moody's slashed the lender's credit ratings by four notches to the brink of highly speculative territory."
CIT is a lender to nearly a million mostly small and midsize businesses and companies. Bloomberg has a good article up looking at the implications a CIT bankruptcy would have on other companies. The firm claims its demise "would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers."
A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.
CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won't allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.
“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn't doing trade finance and lending, its customers will look to other banks for replacement and from what I've seen, they aren't willing to step up.”
That certainly doesn't sound promising. Then again, CIT may be overplaying its hand in attempts to win government support as it tries to stave off bankruptcy. It's trying to make an argument that it's "too big to fail." So far, the government doesn't seem all that swayed by the argument. The Wall Street Journal in fact has a piece looking at retailers and restaurants and the companies interviewed seem to be minimizing the potential effect of CIT's bankruptcy.
Mary Kerr, a spokeswoman for Bon-Ton Stores Inc. (BONT), said some of the retailer's suppliers use CIT's factoring services for financing, although that number isn't large. Right now, Bon-Ton doesn't expect to see an impact on its business, she said, until there are further developments. And if vendors have trouble getting factoring companies to offer them financing, the retailer might be able to help, she said.
"We have worked with vendors in the past when incidents like this have incurred," Kerr said, without specifying how exactly the company would aid those suppliers finding it hard to get financing.
CIT had been a major lender to the restaurant space, offering loans for opening new locations and refurbishing stores, though they scaled back in that department over the last two years, said John Hamburger, owner of the trade publication Franchise. Last year, it sought to make a bigger splash in offering loans to finance larger restaurant transactions, and built up its team, though it was slow going.
Factoring is type of financing where a business sells its accounts receivables (in the form of invoices) at a discount. A couple months ago, I interviewed a factor in a video for our sister publication Business Finance. You can see see that video here and see how the business model works. If CIT fails, there are other firms that offer factoring. So it's going to be hard-pressed to prove that it is providing an indispensable service.
Here are some other news and notes on retail and retail real estate from around the Web today.
- Regional supermarket Basha's filed for Chapter 11 bankruptcy protection. We updated the 2009 bankruptcy and closures list to reflect the news.
- Seeking Alpha had some thoughts on cramdowns in the wake of last week's hearing in Congress on the state of commercial real estate. Seeking Alpha points out that cramdowns, which can lower the principal a borrower owes, are an option for dealing with the current financing mess. And it's a solution that's not available on the residential side.
- Alex Finkelstein has a piece up looking at the Fed's legacy assets program and its slow start.
- Taubman Centers lost an appeal in connection with its 15-year-and-counting fight to build the proposed Mall at Oyster Bay on Long Island.