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Clint Engel

Update: CIT future still uncertain

Terms for new loan pose a big challenge

NEW YORK — CIT Group reached a deal with bondholders that will give it the financing it needs to meet near-term debt obligations, but the threat of bankruptcy has not gone away.

The company - the biggest name in furniture industry factoring and a major lender to small and mid-sized businesses across the country - secured $3 billion in financing from some of its largest bondholders this past week.

The term loan, which matures in 2.5 years, is "intended to provide CIT with liquidity necessary to ensure that its important base of small and middle-market customers continues to have access to credit," CIT said in a press release.

A Bloomberg report noted that CIT will pay annual interest on the loan of at least 13% and that it also agreed to pay a 5% fee to the credit providers. One investment officer who oversees CIT bonds called the terms "egregious," according to the story, which also quoted the president of Egan-Jones Ratings as calling the deal "Don Corleone financing."

CIT intends to use the money in part to pay off $1 billion in debt that matures in August. Under a recapitalization plan, it is offering debt holders $825 for every $1,000 in notes tendered by July 31, and an amended $775 per $1,000 in notes after that date.

While the financing news quelled immediate concerns by many in this industry about an imminent bankruptcy, a day after announcing the financing CIT said the bankruptcy possibility remained.

CIT warned in a Securities & Exchange Commission filing that it may still need to file for bankruptcy protection if its cash tender offer for the debt maturing in August fails. If the company's tender offer expires without enough tenders (at least 90% of the principal) and if that minimum tender condition is not waived, the company may seek bankruptcy relief "unless we are able to obtain alternative financing," CIT said.

That relief could include seeking court approval to sell its assets or pursuing a plan of reorganization, among other steps, the company said.

If CIT succeeds, it still has a difficult road ahead. Several news reports have pointed out that the lender still has about $7 billion in unsecured debt maturing by June 30, 2010, and mounting loan defaults. Additionally, business news services report this week that CIT's bondholders will push restructuring with more debt swaps and a pre-packaged bankruptcy option even if the current tender offer succeeds.

Last week, the Wall Street Journal reported that Microsoft is ending its vendor financing relationship with CIT. CIT will continue to service existing loans, but new business is being routed elsewhere.

Similarly, the initial sigh of relief from furniture suppliers tied to the lender appears to have been short-lived as defection signals have begun popping up. Paul Purcell, CFO of case goods importer Amelia Home and a longtime industry credit manager, said he's been getting calls from supplier friends seeking advice on alternative factors (Amelia Home doesn't use CIT as a factor).

"People (in this industry) rely heavily on CIT as a factor, and they really don't want to wake up and find out they don't have that source," he said. "The companies that do factor with them must be sure they take care of their cash flow and financial needs. If an alternative source is an option, they should be exploring that."

One industry source that has a factoring agreement with CIT and asked not to be identified told Furniture/Today the new financing essentially provides a window for CIT's customers to either jump out of their dealings with the company or restructure their deals.

"And CIT needs to use the window to bring confidence to us," he said. "With them being so unstable financially, it's unnerving."

Suppliers with factoring agreements assign their accounts receivables over to CIT, essentially giving CIT ownership over those payments coming in from retailers. Some then borrow up to 80% on their outstanding accounts receivables balance, while others strictly use CIT as a source for credit insurance and collections.

If CIT files for bankruptcy down the road, furniture suppliers are worried the bankruptcy court could rule that CIT owns the accounts receivables and freeze payment to the suppliers from those accounts. The suppliers can't go after the retailers for payment because CIT owns the accounts receivables. They can go after CIT, but in bankruptcy, their chances of getting the money are probably slim and certainly delayed, he said.

CIT's financing deal doesn't cure all of its ills, but now there is time to step back and restructure arrangements like these so that the industry is better protected, the source said. He still wants to use CIT because "out of the few factors out there, they really are the best," with the longest history with the furniture industry and the clearest understanding of furniture retailers and their ability to pay.

But in the long run, this source said CIT "needs to be sold to a financially sound bank," or work out some additional financial backing.

"They need Obama backing," he said. "They need a solid financial company like J.P. Morgan or Goldman Sachs, someone with money that will not be at risk of going out."

Martin Nason, a partner with consulting firm B2B CFO, said CIT's factoring competitors may want to cherry-pick its customer base. That could make it hard for some suppliers that are paying higher-than-average fees to factor receivables to find a replacement for CIT.

CIT's biggest problem right now is liquidity, he said, but the FDIC wants the lender to raise capital, restructure and raise more flexible debt.

"I just can't believe the government is not going to help in one way or another because CIT is so intertwined and critical to thousands of small and medium-sized businesses, which are the heartbeat of the U.S. economy," Nason said.

Jim Ziozis, president of furniture and rug source Linon Home, was more upbeat than some, calling the financing deal "very positive news," and noting CIT now is "going to have an opportunity to restructure their debts and businesses outside of bankruptcy."

"This shows that there was quite a bit of value in the company for more cash to have gone in without a bankruptcy," he said.

"The crown jewel of CIT as far as our industry is concerned and a money maker is the Commercial Services division that provides factoring and lending to manufacturers and retailers," Ziozis added. "It is important for the wholesale and retail trade that this division is within a strong parent CIT."

Bob Saquet, president of Eggers Furniture in Middleboro, Mass., was initially nervous about the fate on CIT, knowing at least three of his key vendors used the factor. But he's feeling better with the latest news. The interest rate on the new financing CIT is getting sounds steep, but Saquet said CIT essentially is cutting that rate it by paying off its August debt at a discount of about 17%.

"From an accounting point of view, CIT is eliminating a lot of short-term debt and replacing it with long-term debt, which now makes its balance sheet healthier," he said.

Saquet added that he's assuming CIT's other remaining debt noted in news reports was incurred to make interest-bearing loans to this and other industries. He said he's not a certified public accountant and hasn't looked at CIT's books, but believes the company's cash flow will improve with this new financing and that should bolster CIT while its own customers pay down their loans.

"My gut feeling is CIT is going to make it," he said. "They're too valuable to the economy - not just the furniture industry."

By denying CIT a bailout, Saquet said he thinks the Obama administration was sending a message to the private sector "to start saving itself."

The Troubled Asset Relief Program and other bailouts have not cured the credit crisis, he said, because banks are sitting on their bad assets - hoping they will bounce back in values - instead of writing them off. But the government is saying, "You got the money; make it work," Saquet said.
Steve DeHaan, executive vice president of the National Home Furnishings Assn., said he'd received inquiries from retailers wondering where they'd make their payments in the event of a Chapter 11 filing by CIT.

"We tell them they have to honor their contracts. If they don't, they'll be dealing with a different issue," DeHaan said.

Staff writer Heath E. Combs contributed to this article.

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