The troubles of commercial lender CIT Group Inc. have the local apparel industry in uncertainty. CIT, the financial institution that most of the businesses in the apparel industry rely on for financing, finds itself in the midst of a cash crunch, trying to avoid Chapter 11 bankruptcy. What this means for Valley-based clothing companies is unclear, but experts say a potential bankruptcy could have a huge ripple effect. “When CIT has a problem everyone has a problem, it ripples down,” said Ilse Metcheck, president of the California Fashion Association. The garment industry relies on the factoring system through which companies sell accounts receivable in order to get upfront cash until retailers pay their bills. CIT represents about 60 percent of the domestic factoring volume. A potential bankruptcy or changes within the CIT factoring system, could lead to changes in the cost of that essential financing for apparel companies, where upfront costs for material and labor are considerable. “What we’re talking about is this will completely change the cost of money,” said Metcheck. Smaller, less established companies might find it difficult to find financing, as they might not be as “credit worthy” as those larger more established ones. “If not resolved properly, it’s going to mostly hurt the little guy that falls in the range of $3-$25 million- those that have been in business a couple of years. Those will have a harder time replacing CIT,” said Brian D. Thaler, President of the Textile Association of Los Angeles. In the San Fernando Valley, the apparel industry includes large players such as The Cherokee Group and Jerry Leigh in Van Nuys, John Paul Richards in Agoura Hills, and Strategic Partners and Apparel Production Services Inc. in Chatsworth. “The companies in the Valley are pretty strong so the word out there is not panic, but this [a potential restructuring of CIT] will completely change the way companies do business,” Metcheck said. Executives from The Cherokee Group and Strategic Partners declined to comment on CIT’s troubles, and representatives from Jerry Leigh, John Paul Richards and Apparel Production Services Inc. did not return phone calls for this story. But Mark Chang, CFO of A-1 Textiles & Hospitality Products, Inc., a retailer in Pacoima who does not deal directly with CIT, said the fear and uncertainty triggered by CIT’s financial woes is already evident. “I just received a letter from a vendor that factors with CIT asking me to send payment directly to the vendor and not to CIT,” he said. “We’re now in the process of sorting that out.” Accountants and attorneys are also busy at work, helping their clients protect themselves as much as possible from whatever is to come. “Clients are looking for ways to protect themselves,” said Stan Joseph, a partner in the firm Good Swartz Brown & Berns, A Division of J.H. Cohn LLP, who is also the firm’s Apparel and Fashion Industry Practice Director. “A lot of companies are investigating with their teams how they can better protect their position. Companies shouldn’t just sit back and let this thing happen they should consult with their accountants, lawyers, and advisors.” Joseph said. News of CIT’s financial troubles has created fear in the marketplace and has already impacted the way the apparel industry operates, Joseph said. Propelled by uncertainty, apparel companies have started to borrow more than they may need, using their full lines of credit, he said. In the event that CIT would file for bankruptcy there are still a lot of questions unanswered, and a long list of possible adverse impacts. “For example, if a company factors their receivables, let’s say they factor ten million dollars receivables and they drew down 80 percent and then borrowed against that, 8 million dollars, the question is what happens to that $2 million difference in a bankruptcy? There’s not a lot of precedent here. We’d like to believe that that money would be available to our clients, but we don’t have 100 percent certainty of what would happen,” Joseph said. Besides factoring, CIT is also part of a multibank financing system. Would a bankruptcy create problems for other lenders due to these inter-creditor agreements? Also, in the event of a bankruptcy, what happens to the credit protection offered by CIT? “If you go back 20-30 years, there used to be 35 factors give or take. Today there’s probably a half a dozen that mean anything. So the question is, is there capacity in the market with the other factors to pick up the slack?” In lieu of its cash crunch, CIT had asked the federal government for help in avoiding bankruptcy, but government officials refused to step in. Last week CIT accepted a $3 billion rescue package from six bondholders. The deal will give CIT the financing it needs to meet near-term debt obligations, but the threat of bankruptcy has not gone away.
