Mom and Pop Shops Likely to Feel Brunt of CIT's Financial Struggles
CIT, a New York-based bank holding company, operates in 50 countries across 30 industries and is considered a financing powerhouse with more than 1 million customers and $60 billion in finance and leasing assets.
However, the 101-year old lender is in deep financial trouble. Disruptions in the credit market that started in 2007 led to CIT withdrawing from the unsecured debt market, which is historically a significant source of liquidity, the company said in a July 20 SEC Form 8-K filing. As a buffer, CIT chose to draw down on the full amount of its bank credit facilities in March 2008, which brought on more pressure to its funding situation. Downgrades in CIT's short- and long-term credit ratings in March 2008, April 2009 and June 2009 "have materially worsened these general conditions and had the practical effect of leaving the company without access to the commercial paper market and other unsecured debt markets."
"CIT has a lot of challenges. They put together a short-term financing package that may not be that favorable in the short term to meet their liquidity needs," said Stan Van Aartsen, fixed-income senior research analyst with MEMBERS Capital Advisors. "Personally, I think it delays filing for bankruptcy. The same underlying problems that existed two weeks ago still exist."
Credit unions could potentially fill a void left by CIT through accounts receivables, lines of credit and general banking services, Van Aartsen said. That is currently the case with larger banks such as Wells Fargo and Bank of America that are serving some of CIT's biggest customers, he pointed out.
Meanwhile, CIT's situation is so dire that the company recently submitted an application to participate in the FDIC's Temporary Liquidity Guarantee Program. This came after the federal government approved $2.3 billion for CIT through the Treasury's Troubled Asset Relief Program more than six months ago. On July 15, the government rejected CIT's application for the liquidity program, forcing the lender to scramble for alternative financing.
The company's bondholders approved a $3 billion loan on July 20 to provide additional liquidity, but it may not be enough. CIT said it would repay the loan at a rate of $825 for every $1,000 in debt by Aug. 17. However, if the debt is not paid off by then, the company said it may have to seek protection under the bankruptcy code.
One factor hurting CIT is its distressed credit rating. It is now considered a double-C, a sure sign CIT is deeply distressed, said Stu Rossmiller, director of fixed-income research at MEMBERS Capital. CIT has about $10 billion in debt that comes due next year, he added.
"It's a junk bond company. It's very difficult for a junk bond company when you're a financial services company," said Rossmiller, who pointed out that CUNA Mutual does not own any CIT debt. "If CIT finds a way to survive, they will have to dramatically shrink their operations."
Larger companies with household names may have an easier time finding financing. Microsoft Corp. confirmed it recently terminated its vendor financing relationship with CIT. Signed in 2006 and kicked off in France and Switzerland, the agreement was supposed to be a five-year global relationship. Because they are not as financially sophisticated or have billions of dollars in financials, it's the smaller businesses that may feel the sting more from a potential CIT bankruptcy.
"We're talking Granny's quilt shop," Rossmiller said. "It wouldn't be unusual to see these types of businesses turn to credit unions. Their lifeblood is having lines of credits. Credit unions should be prepared to welcome them."
While the $97 million Shoreline Credit Union is watching CIT, more of its focus is on competing with regional banks, said Kenneth Beine, president/CEO of the Two Rivers, Wis.-based cooperative.
"As banks started to pull back on credit last year, that ended up driving some people to credit unions. I suppose the same thing could happen here," Beine said. "If they are a bank holding company, I suspect they will have to find someone to buy the originations and service those portfolios."
Shoreline has an amicable relationship with some area banks. One referred the credit union to a local private high school. And Shoreline has sent loan applicants to banks that it deemed too big for the cooperative to handle, Beine said. Lending activity is also up in large part due to the SBA temporarily offering a 90% guarantee on certain loans and the elimination of some fees. The SBA loans now account for nearly $3 million of its $13 million business loan portfolio.
CIT's accounts receivables and lines of credit are much more complex than commercial real estate loans, said Larry Middleman, president/CEO of business lending CUSO CU Business Group LLC. Credit unions not familiar with CIT inner workings will have to come up to speed on how its vendor financing and leasing agreements work. The loan monitoring process is complicated and the different pricing models can be a challenge given that "we in the industry are not used to pricing aggressively."
"The collateral is a moving target, meaning, accounting gets moved down and around. That will be the challenge for credit unions," Middleman said. "The expertise and resources will be needed to monitor these types of loans. But it's certainly an opportunity for credit unions."
With CUSOs and credit unions experiencing a surge in more frequent and larger requests for working lines of credit (Middleman said the number of seven-figure lines are on the rise at CUBG), the demand could grow as businesses worried about finding liquidity seek out alternative lenders.
"Credit unions are now mentioned in The Wall Street Journal as options. Several years ago, you would not have seen that," Middleman said. "Our presence is being built up."