Over the weekend, CIT Group, a large specialty lender / factor, filed for for Chapter 11 bankruptcy protection. According to the Times Online, "The collapse of the 101-year-old Utah-based lender, which trails behind only those of Lehman Brothers, Washington Mutual, Worldcom and General Motors in size, will leave US taxpayers with a $2.3 billion (£1.4 billion) bill. It is believed the board of the lender, which has $71 billion of loans, approved the filing after its creditors agreed to a pre-packaged plan designed to ensure it emerges from bankruptcy with the core of its business intact." But what are the most important key takeaways that CIT's filing will have for the retail supply chain? Earlier today, I spoke to a number of experts in the area who had strong perspectives on what CIT's filing will mean. I'll share these findings in a series of write-ups today and tomorrow.
Kurt Cavano, Chairman and CEO of TradeCard and an expert in the area of global retail trade, stated this morning that CIT provided financing lifeblood for an important portion of the retail supply chain. While many exporters and importers -- not to mention actual retailers, who are not always direct importers -- pay a reasonable APR if their credit rating is strong (e.g., LIBOR + 200 basis points), Kurt suggests, for companies with less than perfect credit, trade financing costs can easily reach a 10-12% APR. I've personally seen actual APRs hit over 20% based on some research I've done in the apparel supply chain in the case of global suppliers who accepted early payment discounts.
According to Kurt, "CIT made a great living working the edge of the bad credit companies with high rates and keeping the risk down. This worked well until everything cracked. Then the 8-10% they were charging was not enough when defaults rocketed. Combine this with the fact that the management team was levering up the returns by investing in exotic instruments on Wall Street (e.g., CDOs) and it created a perfect storm." However, it was not always this way. Kurt notes that, "CIT had always done a great job of profiting and working with those firms on the edge of bad credit." But going forward, the question remains whether this group will be able to find the liquidity they need to run their businesses if CIT does not come back out with the same type of credit capacity. This is critical because as Kurt suggests, "a huge portion of the retail sector runs on very thin margins" and "use the credit of companies like CIT to run their businesses".
Stay tuned for further coverage on CIT's filing on Spend Matters, including an interview with expert retail analyst Paula Rosenblum.
Update (10:06 AM PDT): Read Part 2 of the series by clicking here.