RETAILERS BREATHE A SIGH OF RELIEF AS CIT STAYS IN BUSINESS; VENDORS WHO SUPPLY 300,000 RETAILERS MAY HAVE A LIFELINE...-TAXPAYERS SHAFTED AGAIN

CIT, a key lender that helps retailers stock their shelves is adding to the industry's worries ahead of the critical holiday shopping season.

CIT Group Inc. filed for Chapter 11 bankruptcy protection Sunday in New York after months of struggling to avoid collapse. The company provides badly needed credit to thousands of small and mid-sized businesses, and is a critical part of the flow of capital in the retail sector.

CIT stressed that its lending operations will continue to operate as it proceeds through bankruptcy with the hope of shedding $10 billion in debt. Chairman and CEO Jeffrey M. Peek said the company's prepackaged reorganization plan "will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy."

But retail groups and analysts warn that the case will likely add to the instability in the retail sector. CIT is an important source of capital, working with 2,000 vendors that supply merchandise to more than 300,000 stores. About 60 percent of the apparel industry depends on CIT for financing.

In the last few weeks, the nation's stores have begun filling their floors with holiday merchandise, but they still need a reliable source of lending to prevent shipping disruptions and to restock after the holidays. Even one day that vendors are cut off from much-needed financing could create a bottleneck, resulting in shipments of merchandise left on docks or in vendors' warehouses.

CIT expects to emerge from bankruptcy by the end of the year, but a dragged-out case or any glitches could further disrupt the already tight credit markets for retailers, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company that is partly owned by Kurt Salmon Associates.

"CIT is the 600-pound gorilla in the industry," Alouf said.

Craig Sherman, vice president of government affairs at the National Retail Federation, thinks the industry "dodged a bullet on the holiday season" for the most part, because most merchandise is in stores' distribution centers. However, he said CIT's woes could throw a wrench in ordering for the important 2010 spring season. NRF officials say that as stores prepare for a rebound in consumer spending next year, access to credit is very important.

Harold Reichwald, co-chair of law firm Manatt, Phelps & Phillips' banking group, said that CIT's case will likely force the company's customers to look elsewhere for financing.

"If I was a small businessman, I would say to myself, 'I have to find alternatives,'" Reichwald said. "In this marketplace, there isn't a lot of alternatives."

CIT's Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The move wipes out current holders of its common and preferred stock, meaning the U.S. government will likely lose the $2.3 billion in taxpayer funds it sunk into CIT last year to prop up the company.

The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year. Treasury Department spokesman Andrew Williams said Sunday that the government will be closely monitoring the bankruptcy proceedings, but acknowledged that "recovery to preferred and common equityholders will be minimal."

CIT had been trying to fend off disaster for several months and narrowly avoided collapse in July. It had struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis. The company pulled back sharply on lending to businesses as it tried to preserve cash. According to its most recent quarterly earnings report, the company originated just $4.4 billion worth of new business during the first six months of 2009, compared with $11.3 billion in the first half of 2008.

The company received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to persuade bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

Ever since CIT's troubles flared up last summer, the retail industry has carefully monitored the lender, with many vendors scrambling to find alternative financing at rivals like Rosenthal & Rosenthal. But finding a replacement hasn't been easy because competitors can only take on so many more clients. Moreover, while large publicly traded companies with sales of more than $2 billion have found the credit market loosening up in recent months, small and medium-based companies have largely found themselves shut out, Alouf said.

The big question is how long CIT will remain under court protection. A prepackaged bankruptcy, which has the support of major bondholders, speeds up the process of restructuring CIT's debt and could help it exit court protection in a matter of months. A swift exit by the holidays could alleviate some retailers' worries.

But, when CIT is active again, will it be able to support financing vendors who sell to troubled retailers?

Factoring works when the customer pays its bills timely, pays timely to CIT which then decides if that vendor can continue to sell goods to that retailer to receive factoring advances.

In my 40 plus year of being involved in the retail industry, I have never seen a larger constriction in available credit, especially since CIT has absorbed so many other factors over the years.

The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT's operations alive and makes it possible for the company to exit bankruptcy by year's end.

But here's the bad news: While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer.

William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded. "We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers."

Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public.

His argument goes as follows:

The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds. More importantly, being the lender of last resort, the government should have guaranteed we'd be the first to get paid if CIT eventually filed Chapter 11. By failing to do so, "it's like he [Geithner] burned billions of dollars again in government money, our money, gratuitously," says Black.

Black believes the problem stems from regulators' fears that if the banks recognize a loss on the bad assets it will create a domino effect that will wipe out the entire financial system.

"If that's true we've got to get rid of capitalism," he warns, "because if we can't recognize losses in a capitalist system we have no future."