Future unclear for CIT
Industry concerned about key lender
By Furniture Today Staff -- Furniture Today, July 20, 2009
HIGH POINT — CIT Group, the largest factoring company in the home furnishings industry, is facing an uncertain future after its request for more federal bailout money was denied last week.
Many in the industry worry that a possible bankruptcy of CIT could cut off a key source of funding for suppliers and retailers. In addition, some suppliers owed money by CIT are now worried about whether they will get paid.
While CIT's furniture factoring business is profitable, the lender has other businesses that are losing money. It's unclear what a bankruptcy could mean to furniture supplier clients owed money by CIT for receivables, and to the retailers who are extended credit through the firm.
Suppliers that factor through CIT wonder if those payments due for receivables would become unsecured claims in a possible bankruptcy filing.
Many suppliers use funds from factoring — which serves as an immediate payment on product delivered to retailers — as working capital, an industry source said. Those companies could be struggling to make payroll or finance other operations if such funds are frozen in bankruptcy proceedings.
“CIT is a critical lender to the furniture industry,” said Andy Counts, CEO of the American Home Furnishings Alliance. He said AHFA officials have told members of Congress that “a collapse of CIT would leave many struggling manufacturers at risk.”
Counts added, “Contacts with other key lenders indicate that alternative sources of credit are not available to make up for the anticipated shortfall.”
Other large factoring companies in the industry include Wells Fargo, GMAC and BB&T.
CIT also is a major player in the textile industry. The National Council of Textile Organizations last week urged the federal government to prevent a CIT failure, which it said could cause bankruptcies and job losses.
“In this terrible economic climate, our members tell us that the loss of factoring and loan instruments from CIT could put many textile companies and their suppliers out of business,” said NCTO President Cass Johnson. He added, “Many manufacturers are running on survival mode right now — a major disruption in financing and factoring would be enough to put many of them under, particularly since there is no substitute for an institution which offers the size and breadth of services to small businesses that CIT does.”
CIT said Wednesday that there was “no appreciable likelihood of additional government support.” On Friday, it said it was pursuing financial alternatives and was “in discussions with potential lenders to secure financing.”
“If CIT puts together some kind of restructuring, then it is more of a blip than a bang,” said Jim Ziozis, president of furniture and rug source Linon Home Décor Products.
Ziozis added that many vendors may not be borrowing from CIT, but factor their receivables through the company. Because of that underlying guarantee by CIT, the vendors' banks have been advancing them loans on the receivables at a favorable rate, he said. Now, all that could change.
George Revington, president and CEO of Home Meridian International, parent of furniture manufacturers and importers Pulaski and SLF, also urged action to save CIT.
“It's just remarkable that the government can bail out clearly failing industries that will have not created new jobs in decades, and pull the lifeblood out of small businesses, which is one part of the economy that does create jobs,” said Revington. “They are just leaving them high and dry.”
While most of CIT's business segments lost money in 2008, according to the company's annual report, its trade finance segment — which provides factoring to furniture companies and others — reported net income of $99 million with a 12.1% return on risk-adjusted capital. Overall, however, the company lost $633 million as other segments were unprofitable.
As of March 31, CIT held $2.7 billion in credit balances for its factoring clients, according to an SEC filing.
Terry Oelschlaeger, executive vice president and Southeast regional manager for CIT Commercial Services in Charlotte, N.C., referred questions to a CIT spokesman. CIT did not comment beyond its written statements. Oelschlaeger's office handles the bulk of furniture accounts for CIT.
In addition to providing financing, companies like CIT can serve as a credit department to suppliers — sizing up which ones are creditworthy enough to sell to.
Ray Steele, vice president of sales for Ultimate Accents, said a CIT bankruptcy would affect not only furniture suppliers and retailers, but also businesses that revolve around furniture, from trucking companies to ocean freight providers.
He said his company was sending letters to Congress to urge saving CIT.
Bob Saquet, president of Eggers Furniture in Middleboro, Mass., said that at least three of his largest sources use CIT as a factor. He said he worries that if CIT fails, suppliers will expect their retail customers to prepay for orders, which would be impossible for many companies already struggling in this economy.
“Like any other business, we depend on cash flow to take care of our bills,” Saquet said. “If we suddenly had to have an extra $100,000 to pre-pay factories, it's not going to happen. We'd have to change suppliers to those who can carry their own invoices.”
He added that he doubts that government officials understand the disastrous domino effect the loss of CIT could have.
“It's nothing but massive business failures,” he said. “The federal government gave GM several billons of dollars. Joe's Furniture fails and they say, 'That's life.' But multiply Joe's Furniture buy a couple of hundred thousand, that's a major problem.”
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CIT troubles could hurt furniture industry
Jul 16, 2009
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