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I asked Moss Adams Partner Frank Kaufman this morning for his take on the CIT bankruptcy. Frank has helped many of his apparel company clients who are CIT customers prepare for this scenario.
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Although I have yet to read the actual documents, it appears that the parent of the factoring group has filed for protection under the bankruptcy laws.The fact remains that many companies still prefer to purchase credit protection and have trade cycle financing through a factor. There will be challenges for the smaller companies to get credit protection as the overall credit checking pool diminishes. Most companies have already committed to their holiday inventories so I suspect shipments will continue with little interruption, either approved or not.
The filing at the parent level will buy some time on cash outflows. The factoring group says they have liquidity and will fund advances as normal. This is likely at least through the end of the year. However, operations have been impacted as several large companies have left CIT. I suspect they will go through and make cuts internally, not dissimilar to what has been occurring at their clients during 2009.
In real estate, it is about location, location, location. In this situation it is about timing, timing, timing. The filing was inevitable. Unfortunately, the decision making at the parent level has been unrealistic. The first critical time frame was more than a year ago when opportunities for investment were thwarted by decision makers with inflated expectations.
Another stage in denial was in December of 2008. Before you form a bank and take $2.3 billion in TARP funds, you need to really assess whether you have addressed or only delayed the problem. They have one last chance. We are now in the midst of their strongest quarter. They need to move swiftly - and have a plan confirmed before 12/31. This plan will be accessible to the public, and it needs to provide reasonable assurance that the factoring group will have funds going into spring. If this does not occur, the extent of companies exiting the factoring group easily could drop business below critical mass.