Looking at all the "factors"

As a follow up to our First Look callout on the CIT situation we'd like to point out some additional facts.

- CIT is one of the largest (and oldest) "factors" to the apparel trade, but it's not the only one. Wells Fargo, GE Capital, and Bank of America are also some of the larger players in the space. A quick Google search also lists numerous smaller and regional players which routinely service manufacturers. If CIT were to cease purchasing receivables then you don't have to be a rocket scientist to figure out that there'd be a temporary setback to the small and middle market manufacturers that require receivables based financing. After all, CIT's $6bn in its trade finance asset portfolio represents about 6-8% of total industry receivables. However, it is likely that alternate sources of funding would be found as market share would accrue to the other large players in the space.

- Looking below the surface, it's important to note that CIT is predominately a lender to the middle market and small businesses. The issue of potential failure here is really confined to the trade originated by smaller businesses that, in aggregate, could have a broader impact on the overall environment. Clearly any failure or disruption in the availability of credit is relevant, but the impact on the larger publicly traded manufacturers and retailers (indirect impact from potential product shipment disruption) is not likely to be noteworthy.

- The real risk in this situation lies in the cost of capital. As Keith and our Macro team have repeatedly pointed out, the risk in the current market lies with companies that are saddled with financial obligations in a rising cost of capital environment. This holds true for the mom and pop, local, or regional player that is most dependent on factoring to boost the cash flow cycle. Even if vendors are to find new sources of financing it is likely to be at an increased cost, resulting in further pressure on sales and margins. The flip side of this equation is that the larger players with clean balance sheets are likely to gain share at the expense of their smaller competitors. With our day to day focus centered on the public markets, we tend to forget that there is still a substantial amount of small business activity centered in the retail and apparel trade. Of the approximately $200 billion in US apparel retail sales, the top 20 national brands account for only 30% of the total volume. We also estimate that about 60% of apparel in the US is sold through a publicly traded entity.

- With the decks already stacked against the smaller player whose financing options may already be limited, the CIT situation may force the hand of owners to seek partners or outright sales of their businesses in an effort to stay afloat. We've been talking about consolidation moving up the spectrum to larger scale deals, but a sustained dislocation in financing could lead to a change in activity as it relates to size. At the end of the day, this is yet another driver of consolidation albeit in a less efficient manner than the likes of a Linens or Circuit City.

Looking at all the "factors" - cit portfolio