Retailers May Take A Hit With CIT Chapter 11 Bankruptcy

November 10th, 2009 by Reed Allmand

According to an article in the Star-Telegram, CIT Group’s Chapter 11 bankruptcy is a source of angst for the nation’s small and mid-sized retailers, many of whom rely on the lender for credit. CIT Group insists that its bankruptcy will not cause disruptions for the already instable retail industry which has watched revenues drop since the financial crisis began.

The article said:

“…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…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 Groups says that it fully expects to operate normally during their bankruptcy and that they plan to emerge from bankrupt by the end of December. But its stockholders and creditors (including taxpayers) may not emerge from the bankruptcy unscathed.  CIT Group is hoping to shed $10 billion in debt during bankruptcy, a move that will wipe out common and preferred stockholders and the US taxpayer which lent the troubled company $2.3 billion.  The question for retailers is, “How will CIT Group’s bankruptcy help unfreeze the stagnate credit markets?”  At this point it is unclear. CIT Group’s bankruptcy will give it the flexibility of using more cash to lend to retailers; but how much lending will increase is anyone’s guess.