Small Talk: Jobs data contradictory
Over the last week there have been some wins and losses for small businesses in terms of new job data.
On the win side of the ledger, a new Intuit survey shows 44 percent of small businesses say they plan to hire in the next 12 months. The data is included in a San Francisco Chronicle story profiling a local Web startup – Airbnb.com – that is doing its part, having hired seven people since April, at a time when national unemployment has reached a 26-year high of 10.2 percent.
But that optimism is tempered by a USA Today story that said the main reason the unemployment rate jumped in October was due primarily to small businesses cutting staff. It seems that while some small companies are starting to hire again, they are still outnumbered by the ones laying off their workers. The story quotes Moody’s economist Mark Zandi, who explained there is a bias towards big companies in how the Labor Department compiles its payroll survey, which showed October job losses were down nearly 50 percent (190,000) from the average of 357,000 in May, June and July.
BANKRUPTCIES HURTING OBAMA EFFORTS
Small businesses are trimming staff, because many of them can’t get the loans they need to stay afloat until the economy picks up again. The Obama administration is ramping up efforts to get more money into the hands of small business owners, but the President’s efforts have been hamstrung by the bankruptcies of two of the country’s biggest small-businesses lenders: CIT and Advanta.
CIT lends to more than a million U.S. small businesses, while Advanta – a small business credit card lender – is trying to collect close to $3 billion in outstanding loans to 360,000 clients. The idea of both CIT and Advanta calling in markers has sent small businesses into a panic. The filings, which came just a week apart, may well be why Obama has chosen next week to stage a small business forum in Washington, in which U.S. Treasury Secretary Tim Geithner and Small Business Administration head Karen Mills will engage small business owners on the best way to get them more financing.
Sensing an opportunity, JPMorgan Chase & Co. announced yesterday it is stepping up lending to small businesses by $4 billion. A Reuters’ story suggested JPMorgan, which received $25 billion in public TARP money, could also be responding to government pressure to do its part to help get the small business economy back on its feet.
CIT bankruptcy could have domino effect
Small and medium-sized businesses are wild with concern that the bankruptcy filing of CIT Group will cut off the financing they use to pay employees and creditors, according to an attorney who has many apparel and retail businesses among his clients.
“My phone has not stopped ringing,” said Jerry Reisman, a partner at law firm Reisman, Peirez and Reisman in Garden City, New York. Reisman said he represents 21 groups that depend on CIT for factoring and other financing. He also represents an additional four parties that have applied to CIT for new business financing.
“People were astonished. They don’t know what to do,” said Riesman, who took more than 10 calls during Sunday’s baseball World Series game and at least 10 more on Monday morning before 10 am EST.
“They have to make payroll this week — they don’t know whether they will be able to meet obligations for payroll or for suppliers.”
One of the biggest concerns is so-called antecedent debt, which refers to checks from CIT that its clients have received in the past 90 days, said Reisman.
“Any money received from CIT in payment of antecedent debt is considered a preference, and, under the bankruptcy code, has to be returned to CIT,” he said. “It could cause my clients to have to file bankruptcy. This could have a staggering domino effect. It’s going to be devastating. It will destroy their own businesses.”
Reisman said his firm is trying to find other sources of financing for his clients. “But now the problem is, some of them don’t qualify because credit markets have tightened,” he said. “They don’t qualify for financing from other lenders.”
If CIT common is now worthless, why is it trading on the otcbb
CIT = more bad news for small business
Just when it looked like President Obama was making some headway with small business, along comes the CIT bankruptcy train to derail everything.
Last Thursday, on Obama’s urging, the House of Representatives overwhelmingly passed new legislation that authorized more than $40 billion for loans backed by the Small Business Administration. It was the relief U.S. small businesses had been hoping for. But just 72 hours later the good news was tempered when CIT Group Inc. – the SBA’s top lender – filed for bankruptcy protection. Now all that new federal money may be loaded onto a train missing its locomotive.
CIT’s failing could leave as many as a million small and medium-sized businesses looking elsewhere for credit in a marketplace where few banks are lending. According to the National Small Business Association, CIT lent $65 million in SBA-backed loans for the first six months of 2009; just 1 percent of all SBA loans issued. That figure was down dramatically over 2008, when CIT comprised 6 percent of the SBA total.
At a time when loan defaults by SMEs are rising and Equifax is reporting that small business bankruptcies are up 44 percent over last year, the CIT news is akin to a perfect storm for small business.
“It’s great that the stock market is coming back, but if you’re unemployed or you’re running a small business, the turnaround has not happened,” said Drew White, CFO for Sageworks Inc., which monitors the financial data of privately-held companies across 1,600 industries. Sageworks’s latest study found that since 2003 the debt-to-equity ratio decreased in the private sector, which might normally be a good thing, but according to White is likely the result of companies paying down debt and shrinking inventories due to slower sales and tightened credit in the recession. “It looks like there’s sort of a benchmark or a normal way that these businesses operate and they need a fair amount of borrowing capacity to do that and that has been restricted and constrained.”
Unlike Equifax, Sageworks only crunches the numbers for companies currently being audited, so White conceded the numbers are likely worse than their latest report shows. He also doesn’t anticipate a turnaround over the next couple quarters, unless the jobless rate improves and consumer confidence rebounds.
“Even if they (retailers) had a lot of access to credit, I don’t know if they’d be making a lot of big bets and say let’s go stock up with a bunch of inventory, because there’s certainly no evidence people are flocking back to buy things,” said White, who added the efforts by the government to stimulate lending are great, but it’s not a panacea. “In the long run the fundamentals of the economy have to come back: people have to be employed, people have to feel better and people have to start investing and buying. We don’t see much evidence of that.”
Anybody who didn’t see this coming over the past two years had blinders on. Between the CEO’s careless management of the company to the SBL division that would provide a loan if you could breath it is no wonder that CIT is in this situation. In an economy where even the most well run, conservative banks are struggling with their loan portfolios its no wonder that CIT is failing. I’m sick at the loss of the taxpayer’s money but why would you allow a company to form a bank holding company then receive TARP funds a couple months later….sounds like a poor credit decision on the part of the government. Unfortunately the losers here will be the taxpayers and small businesses. Shame on you CIT and the Federal Government.
from DealZone:
Icahn takes a shot at CIT “Tammany Hall” financing
As if CIT didn't have enough problems digging itself out of a credit morass, now it has Carl Icahn to contend with. Troubled by what he sees as sweetheart deals between CIT and its largest creditors, at the expense of the little-guy bondholder, Icahn has offered to underwrite the $6 billion the small-business lender says it needs to survive. Icahn's offer sent CIT shares soaring by double digits ... to well above a dollar.
In a letter to CIT's board, Icahn said certain large bondholders are being offered an opportunity to purchase secured loans at prices well below their fair market value.
In the end, Icahn underwriting offer may serve more as a publicity stunt than a White Knight vanguard attempt to save CIT, which is busy searching for a new CEO -- presumably, a restructuring artist.
A week ago CIT CEO Jeffrey Peek told the company he would retire, thumbing his nose at a fresh one-year contract renewal and firming up market expectations that the company would soon seek bankruptcy protection. It's hard to accept that the 11 percent stock move this morning represents a serious shift in that expectation.
from DealZone:
Lending CIT a hand
An almost heart-warming effort is being mustered by CIT bondholders to keep the troubled lender from getting put under the TARP or stumbling into a much-anticipated bankruptcy. Some $3 billion in survival cash is seen in the pipeline -- money that could strengthen CIT's finances and allow it more time for a debt restructuring. An announcement is expected before the markets open this morning.
What kind of terms might bondholders extract from CIT? Before TARP was modified to target executive pay for those who sought its shelter, banks such as Citigroup and then-independent investment house Merrill Lynch paid what were seen as shockingly high terms on mandatory convertible debt. They were the kind of rates Citi customers paid on credit cards; nothing like traditional bank funding rates.
So, a CIT deal could, and perhaps should, come with a variety of stringent terms. If these are effectively passed on to desperate small and medium-sized businesses that CIT serves, the cost of this rescue could be blamed for stifling the recovery.
Would a CIT bankruptcy hurt your business?
CIT’s bailout talks with the government have fallen apart, setting the stage for a possible bankruptcy filing.
The lender provides crucial funding to small and mid-sized U.S. businesses, from clothing manufacturers to Dunkin Donuts franchises.
Founded in St. Louis in 1908, CIT boasts on its website that 1 million business customers depend on it for financing. Many may now have to depend on someone else, at a time credit markets remain tight, reducing business activity as the government tries to lift the economy out of recession.
Is your business affected by CIT’s struggles? Have you found it difficult to obtain financing since the financial meltdown? We want to hear your stories in the comments section.
CIT files for bankruptcy as they finally seem to have exhausted all of their options. It remains to be seen what the ripple effect of the CIT news will be on small and midsize businesses (SMBs), and the economy as a whole. The fallout of CIT will only exacerbate the struggle for these companies- especially retail and manufacturing. For our economy – and the small and midsize companies that drive it – to fully recover, it is imperative that they have broad access to small business financing.
There is one silver lining for the companies, The Receivables Exchange (www.receivablesxchange.com). The Receivables Exchange stands ready with more than $20 billion in liquidity from leading hedge funds, banks, ABL, factors and other accredited institutional investors to fill the liquidity gap these nearly one million companies will face. Our market-based solution delivers an efficient source of liquidity at competitive rates and stands ready to have our global network of accredited institutional receivables buyers compete to bid on the outstanding invoices of these companies. The Exchange can help these SMBs protect against exposure to a single source of liquidity and gain ready access to credit- all on their own terms.
peHUB: If CIT goes down, these companies may be hurting
peHUB’s Erin Griffith reports:
Buyouts Senior Editor Ari Nathanson and I compiled a list of buyout-backed companies which have used CIT as a lead arranger on its credit facility over the last three years, courtesy of Thomson Reuters data.
We came up with 38 companies.* Of those 38, CIT provided a revolver loan to all but two. For companies that haven’t drawn down their revolver (including this week’s run, which has only added to the company’s demise), the sudden disappearance of CIT could mean the sudden disappearance of all liquidity.
The interesting part is the amount of repeat business on the list. It brings new meaning to the “strong lender relationships” often touted by buyout pros. The one thing they don’t brag about is how a “strong relationship” with a failing lender could wind up being worse than no relationships!
For example, Wind Point Partners used CIT for four of its portfolio companies. Thoma Cressey Equity Partners (before Carl Thoma and Brian Cressy split up) also has four CIT-led credit facilities in its portfolio. Sentinel Capital Partners and Baird Capital Partners each have two companies with CIT facilities.
View the entire list below.
*We eliminated a few that have since been sold, but haven’t checked that each of the 38 are still owned by their listed PE backer.
from DealZone:
CIT’s strong hand
CIT, the small-business financing company that provides funding for airlines, railways, retailers and manufacturers, should have little trouble securing some kind of government aid, whether in the form of a short-term loan, as seems to be the most likely scenario, or even a TARP or FDIC bailout.
Public antipathy toward bailing out financial companies was pretty much exhausted months ago. Plus, with banks still skittish about lending, CIT serves a clientele that has both ready demand and strong support in conservative corners of Washington that have long touted small business as their base.
The more hearty free marketers say CIT clients will be able to find funds elsewhere if the company does go under. But in the current environment, might a government agency be just as likely to fill that role as the banking sector?
In 2002, there were approximately 23 million small businesses in the United States according to the US SBA (Small Business Administration).