Wednesday, July 15, 2009

That CIT Bailout Delima Is No Small Issue

From CNBC, Crisis Flares Anew as Lender CIT Seeks Federal Aid

  • In a sign the financial crisis isn't over, CIT Group, the No. 1 lender to small and mid-sized U.S. businesses, is scrambling to get help from the federal government.
  • The government may have good reason to talk with CIT. Some analysts suspect a collapse of the company, whose 1 million clients include big names from the franchisee of Dunkin' Donuts to retailer Dillard's, could deal a devastating blow to the economy by cutting off financing just as businesses need it most.
  • That in turn could force thousands of small and medium-sized companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery.
  • "They'd have to lay people off, downsize and maybe shut their doors," independent banking analyst Bert Ely said of CIT's clients. "It would hardly be positive for the economic recovery
  • "If CIT were to go away, it would take a financing option away from our franchisees who want to buy stores or expand their networks," said Michelle King, spokeswoman at Dunkin' Brands, parent company of the Dunkin' Donuts chain.
  • For the apparel industry, a collapse of CIT would have "near cataclysmic," consequences for its small to mid-sized clients, said Andrew Jassin, co-founder of Jassin-O'Rourke Group an apparel consulting company.
  • The retail and apparel industries, which also include CIT clients like Dillard's and Bon-Ton Stores, is preparing for the critical back-to-school selling period and is in the midst of ordering merchandise for the holidays.
  • "This could affect the lifeblood of the flow of goods to the stores," said Vincent Arscott, senior director of Fitch Ratings.
  • Some analysts likened CIT's dilemma to a high-stakes game of chicken. They suggested that hiring the bankruptcy law firm was designed to pressure the government to step in with help.

    But by rescuing CIT, the administration may have to rethink whether to commit more taxpayer money to other firms that get into trouble or simply let them fail.

    If the government turns its back on CIT, "what does that say for ... other companies that the government has given the backstop to?" said Jesse Litvak, a trader at Jefferies.

    CIT, which in April posted a bigger-than-expected first-quarter loss, has been hit hard by the ongoing credit crisis as investors have shied away from purchasing all but the safest forms of debt, leading to a near disappearance of funding options.

    Unlike banks that rely on deposits for money, CIT gets funding by selling commercial paper and other types of debt.

    Without access to the TLGP program, CIT would have to find alternative funding that would likely need to be secured by its assets. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.

    CIT's troubles will make it harder to refinance that debt in coming months, raising fears that it could default.

On Chicago Tribune CIT woes don't bode well for holiday

  • CIT is a major cog in making sure orders get paid for and delivered to stores. Without CIT, retail shipments for the critical holiday shopping season could be in jeopardy and, in turn, set off a new wave of bankruptcies among retailers and vendors.
  • Vendors that sell to Wal-Mart and Target as well as to smaller independent retailers rely on CIT for factoring services.

    Most of the vendors are mid-size manufacturers of apparel, textiles, furniture, home furnishings and electronics that generate less than $50 million in annual sales, according to CIT.

    "They are generally not very well capitalized," said Jonathan Lucas, chief sales officer at CIT, in a transcript of a May interview conducted at the company as part of a financial education series. "They do not have alternative sources of capital. We provide that source of capital."

    Most experts agree that without CIT, vendors will have to scramble for funding that is hard to come by in a tight credit market. But there is little consensus on the importance of its role in keeping the supply chain moving.

    "We believe that should CIT cease lending, probably a good portion of its lending done to creditworthy clients could be assumed by another bank," CreditSights, a New York-based research firm, said in a report Monday.
  • "It's terrible for everybody," said Homi Patel, chairman and chief executive of Hartmarx Corp., the apparel manufacturer that filed for Chapter 11 in January and is being sold to a private-equity group.

    Hartmarx doesn't rely on CIT, Patel said. For vendors that do, it is a lifeline, especially in tough economic times.

    "If vendors don't have the advance on orders received from retailers, then they don't have cash to run the business," he said. "And if they don't have cash to run the business, a retailer won't place orders with them. It's a vicious cycle."

On the Globe and Mail Washington faces CIT bailout dilemma

  • At a glance, CIT appears too small to really matter – $75-billion (U.S.) in assets and ranked 26th in the country. Experts and regulators say its demise would pose no systemic risk to the banking industry.

    But CIT happens to be a major player in the business of providing loans to small businesses, a sector considered crucial to reviving the job market and lifting the United States out of recession.
    In its pitch for government aid, the New York-based lender has argued that a collapse would put 760 manufacturers at risk and “precipitate a crisis” for 300,000 retailers.

    So the question now is, can the U.S. government afford to let CIT fail?
  • CIT is facing a looming cash shortage as several series of bonds mature. Debt rating agency Standard & Poor's warned yesterday that the lender could go bankrupt without government aid.

    The case for a bailout is dubious, according to bank analyst Kathleen Shanley of, a research firm that specializes in corporate debt. The government has already let much larger banks fail – Lehman Brothers ($639-billion in assets) and Washington Mutual ($309-billion in assets), which was seized by regulators last September and sold to JPMorgan Chase.

    The reality, according to Ms. Shanley, is that the FDIC “waiting room” is filled with troubled banks just like CIT, many just as deserving.

    “There is a long list of other troubled banks awaiting regulatory attention, some with more insured deposits at risk than at CIT,” Ms. Shanley said. “It may be time for regulators to admit that not all bank holding companies should be saved.”

    She pointed out that other business finance companies have failed “with no serious repercussions.”
  • Barry Ritholtz, a market strategist with Fusion IQ, said a rescue for CIT would send the message that just about any company qualifies.

    “Bailing out CIT will make a mockery of systemic risk, as if it wasn't already subjected to humiliating abuse as an economic concept,” he argued.
  • CIT boasts roughly a million customers, everything from daycare centres to Dunkin' Donuts and several National Hockey League teams. But analysts said its lending supports less than 1 per cent of all U.S. retail and manufacturing businesses.

    CIT may not be big, or systemically vital, but it has some powerful defenders in the U.S. Congress, where the plight of small business is a growing political issue.

    “If they could no longer lend, it would cause disruption across the country to countless small business,” Carolyn Maloney, a New York Democrat and chairwoman of the joint economic committee of Congress, said in a statement.

Long term investors getting creamed at CIT!