You’ve probably heard by now that CIT Group filed for bankruptcy protection over the weekend. But despite all the hype about this being one of the biggest corporate bankruptcies in U.S. history it looks like most retailers may have dodged a bullet.
CIT is important to the retail industry because it provides specialized “factor” financing to about 2,000 suppliers who furnish goods sold at about 300,000 retailers across the country. Factoring lets suppliers get immediate cash for just-delivered orders so they can proceed with work on their next order while waiting for retailers to pay, typically in 60 days. CIT is the largest firm that does this, and credit-crunched suppliers have few backups.
When CIT appeared to be on the verge of collapse in July, retailers panicked. Our industry was in the middle of the back-to-school season and the all-important holiday season was fast approaching. NRF immediately asked the Treasury Department and FDIC to step in, but the agencies refused to provide financial assistance. The news from CIT was on a roller coaster through the remainder of the summer, with bankruptcy imminent one moment and a deal with creditors being worked out the next.
The nature of factor financing is that it affects merchandise due to arrive in anywhere from 30 to 90 days. So a CIT shutdown as recently as September could have created a hole in the retail supply chain big enough for Santa to drive his sleigh through. But at this point, most merchandise for the holiday season is already in retailers’ distribution centers if not on store shelves, with more goods sufficiently advanced in the pipeline that they will be here soon. If there is to be any holiday impact from CIT, it might come in terms of restocking.
Once retailers get past the holidays, we have the annual lull of January before the next big surge comes when spring merchandise begins to arrive. That gives some time for the dust to settle from the CIT bankruptcy and, if need be, for other lenders to step forward.
It’s also important to point out that this is a Chapter 11 reorganization bankruptcy, not Chapter 7 liquidation. And it’s a “prepackaged” plan where CIT expects to keep lending during the bankruptcy and will emerge at the end under the new ownership of its creditors. If the plan works and vendors can continue to receive financing, there might be little if any impact on retailers at all. That’s a big “if” but the situation is very different than if CIT had simply closed its doors.
We’ve dodged the bullet. Now we just have to watch out for ricochets.