Apparel Sourcing Intelligence - Worldwide

Kellwood and CIT: we may still be near the brink

Kellwood and CIT have survived the threats of bankruptcy. But the spectre of serious damage to the world garment supply chain remains.

The threats to CIT, though, may not have gone away at all. On July 21 CIT agreed a $3bn loan with some of its main bondholders after the US government refused to bail it out. But the loan it obtained was a full ten points over LIBOR, news reports believe. And, after reporting $3 bn of trading losses in the past eight quarters, CIT predicted a $1.5 bn loss in the second quarter of 2009 alone.

CIT, according to some estimates, had 60% of factoring in the US apparel and footwear industry, meaning its demise would cause major disruptions in the apparel supply chain. Retailers would have been short of stock, their immediate US suppliers would have faced bankruptcy, and the knock on effects of unpaid bills owed to highly vulnerable emerging market vendors was rarely even discussed.

It is clearly possible CIT may go under at a later date

The Kellwood threat appears truly over. The company had been unable to get Deutsche Bank, a key bondholder, to agree repayment terms, leading to a high likelihood of a bankruptcy being triggered. The business says it is fundamentally profitable, Deutsche has now committed to a new payment schedule and there seems no likelihood of any other immediate threat to Kellwood.

But the Kellwood case does demonstrate that risk is still there. It now appears Deutsche refused to renew its bonds in the first place because it had protection programmes that actually improved Deutsche’s trading position by refusing renewal – and ensured Deutsche had little to lose if Kellwood did go under. Though Kellwood are unlikely to hit this problem again, the episode shows how modern debt trading systems can make bankruptcy profitable for some lenders. Businesses selling to cash-strapped US retailers or intermediaries need to review their credit management to avoid being the victims of an ultimate CIT failure or a Kellwood-style problem turning into a real bankruptcy.

In the Kellwood/Deutsche case, it seems as if Deutsche would have scarcely been damaged if Kellwood had gone bust. Many of Kellwood’s suppliers would have been wiped out