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Local retailers make provisions in case of CIT bankruptcy

Devising backup plans as CIT Group teetered on the brink of bankruptcy made for aggravating times last week, says Urban Outfitters chief financial officer John Kyees.

Devising backup plans as CIT Group teetered on the brink of bankruptcy made for aggravating times last week, says Urban Outfitters chief financial officer John Kyees.

So it was a relief yesterday when the New York financial institution - a critical player in retailing, whose loans in the "factoring" market are important for merchandise deliveries - apparently averted bankruptcy with emergency funding.

Now, even if CIT's finances unravel down the road, Philadelphia-based Urban Outfitters has protected itself.

"We're well-prepared," Kyees said, "because we're identifying all the vendors that are factored by CIT and working with our merchants."

Hustle was the order of business among retail executives alarmed by the news that CIT's financial distress might lead to a Chapter 11 bankruptcy declaration. Officials at Urban Outfitters and Boscov's Department Store L.L.C., based in Reading, worked the phones to ensure that even if CIT were to go under they would continue receiving merchandise.

"We're sending letters to all of them asking, if something were to happen to CIT, what is their plan," said Albert Boscov, the retail chain's chief executive.

At Urban Outfitters, "we called our folks at Wachovia, who are now Wells [Fargo], and said, 'How would you feel about factoring if CIT fell apart on some of our vendors?' and they said, 'No question,' " said Kyees, whose company is cash-rich despite the economic malaise. "Our balance sheet is pristine."

Beyond its role as a commercial lender, CIT Group is the nation's largest issuer of short-term loans in the factoring market.

When smaller and midsized manufacturers and vendors are ready to ship an order to a retail chain, they turn to a so-called factor to pay them in full for the shipment.

That gives retailers up to three months to review the order before paying for the goods. Manufacturers, meanwhile, get the cash and can move forward.

The factor charges interest, and, like a bank, also takes full responsibility for collecting payment from the retailer. If a retailer goes bankrupt or can't pay for what it received, the factor gets stiffed - not the vendor.

Because of that, the factor also evaluates a retailer's creditworthiness before agreeing to front money for a shipment - something that helps keep midsize vendors from getting bruised.

"The small manufacturer, they don't have a big credit department," said Boscov. "They don't have analysis. So to them, getting someone who says the day you ship, 'We're going to give you the money, and you don't take the risk,' is a tremendous asset to small manufacturers."

If CIT were to disappear from a field it now dominates, thousands of vendors and manufacturers would be left scrambling to find another short-term lender such as a bank - an intense task in a tight credit market.

Cash-strapped vendors also could demand full payment at time of delivery - a tactic more often employed when a beleaguered retail company is no longer deemed worthy of credit.

"Very few retailers will pay up front, to make sure they get the goods and the goods are in the right quantity and so forth," Boscov said. "So it's a real problem." His stores buy from 350 vendors and manufacturers who use CIT as a factor.

Urban orders merchandise from 140 vendors that use CIT as a factor, mostly for goods shipped to its 266 Anthropologie and Urban Outfitters stores, Kyees said.

Neither retailer has reported delivery problems so far.

In the case of Boscov's, CIT also is one of four lenders holding a slice of a $200 million loan that financed the chain's emergence from bankruptcy last year. Boscov said the other lenders would cover CIT's loan obligations if necessary.

Were CIT to fail, it could potentially disrupt back-to-school and holiday shipments from vendors such as "the $50 million-a-year T-shirt company rather than one of these big companies like Jones [Apparel] or Liz Claiborne," said Wharton retailing expert Stephen J. Hoch.

But with word of CIT's temporary reprieve, through a $3 billion deal with major bondholders, such fears have receded a bit.

"Better that it get sorted out now," Hoch said, "than . . . crunch time."