CIT Group, Inc, is the largest commercial lender to small and medium sized businesses in the
CIT has had financial difficulties for a number of months as the credit market dried up. Last week it looked like CIT was going to have to file bankruptcy. This would have been especially difficult on the tens of thousands of trade credit customers CIT has. Included are factoring clients and asset-based loan (ABL) clients.
At the end of April 2009, CIT had an outstanding trade credit portfolio balance of $2.8 billion. Nearly all of CIT’s trade credit customers require high touch and many of them distribute goods to retailers before and during the Christmas season. Had CIT ended up in bankruptcy last week, it would have spelled near disaster for many CIT trade credit customers. For many companies, their source of working capital would be interrupted at a time when the credit for inventory was most needed.
Additionally, to the best of my knowledge, no non-recourse factoring company the size of CIT has every gone through bankruptcy. As a non-recourse factor, CIT buys invoices from its customers. It advances approximately 80% at the time of the invoice purchase and refunds the 20% reserve less its fees at the time CIT is paid by the debtor. The question that would face a bankruptcy court is whether the reserve funds belonged to CIT (a CIT asset) or to the customer and what percentage they would get returned to them. CIT client reserve funds could get held up for a very long time, crippling many companies. For many factoring clients, the reserve fund is about the same as their gross profit.
On Sunday July 19th, CIT’s bondholders agreed to make a short-term $3 billion loan to the company. The details of the workout have not completely been made public, but bondholders are inclined to see their loans and bonds repaid by the sale of some of CIT’s more valuable assets such as their trade credit portfolio which includes factoring and asset-based loan customers. On Friday, it was rumored that Goldman Sachs had offered to buy this division of the company.
Clearly, CIT is not out of trouble as the company has several very unprofitable segments and liquidity for the company is not likely to improve in the short-term. Bankruptcy could be the final destination for this company, or the sale of profitable segments and a downsizing may be the final outcome.
If you are a CIT customer and are using their factoring or asset-based loan products, it would be prudent to look at your contract renewal date and start talking to other lenders who you might consider changing to. At the present time, factoring companies are appearing more highly capitalized for their size than ABL lenders, and the trade credit industry is seeing more ABL lenders in trouble than factoring companies.
The most important step a CIT trade credit customer can do is to keep up with the news about their lender and be prepared to change with short notice.