CIT Woes Are Going to Hurt Even More

The front page lead article in today’s Wall Street Journal headline states “CIT in Last-Ditch Rescue Bid”. It indicated that CIT was going to try a financial restructuring by turning over the company to bondholders. It also indicated GM tried that same thing and not enough lenders accepted the deal forcing GM into bankruptcy. The article’s tone suggested the same may be true for CIT and bankruptcy may be just around the corner.What’s this mean for the furniture industry? Well a number of factories still factor with CIT because they have no other option. If bankruptcy actually occurs, whatever monies they are owed at that time will be wiped out. As for retailers, they may see their lines of credit disrupted even further because factories will abandon CIT in favor of other factors. The more factories a retailer has at one factor, the more exposure that factor has to the retailer. These factors probably will not raise a retailer’s unsecured credit lines even if they take on new factories. So a retailer’s available credit lines will potentially be decreased if CIT goes away.
In the Rep survey I conducted one of the biggest sources of frustration was credit. I would hazard a guess it could get worse. Not only are many factories and retailers still struggling, but a loss of a major factor for the industry could cause serious challenges for our industry. Who will step in to fill that void?

Here’s an additional problem if CIT goes bankrupt - the debt owed by a retailer that is factored and not yet paid by the retailer. Who does the retailer pay, the bankrupt CIT or the factory that actually is owed the money? If they pay the bankrupt CIT, the factory may never see the money. If they pay the factory direct, will CIT claim they are contractually obligated to have paid CIT, and therefore still show an open account balance that at some time in the future a bill collector may come and try and have the retailer pay back. What a mess that will be.

There will be very definite winners and losers if CIT goes bankrupt. The people hurt will be factories that depend on CIT and cannot find another factor. They could be put out of business. If CIT declares bankruptcy, they will lose what they have factored at the time. More importantly they will lose the source of financing new business.

But there will be winners as well. Those factories that carry their own receivables like a couple of my factories, Ligo Products and Progressive Furniture, may actually get more dealers because they only factor their own products and have less overall risk. The other winners are retailers that have good balance sheets. Those that have the ability to pay cash for goods will also benefit because they don’t need to be factored. They can make deals to buy for cash.

In any case, these are tumultuous times that are going to change our industry dramatically. Let me know your thoughts.