ABF Journal: John, in your estimation, has the factoring industry taken ground in getting the recognition it deserves? What role would you say did factoring play in keeping the economy going during the recent recession?
John Daly: I have spent my career in the factoring industry, so I will be the first person to tell you that factoring is integral to ensuring there is a smooth flow of funds and information between retailers and their suppliers.
In 2007 and 2008, there was a lot of uncertainty at retail. Circuit City, Linens ‘N Things, and Gottschalks are just three of the retailers that went out of business, and questions swirled around dozens of others. Despite the uncertainty in the market, we continued to provide credit protection and advances secured by the accounts receivable of many of the struggling retailers, thereby serving our clients’ needs during a difficult time. So I would say that factoring played a very important role in recent years in supporting the U.S. economy.
ABFJ: As the world recovers from the global recession, how did factoring volume fare specifically Asia and Europe? What is the outlook going forward?
JD: According to Factors Chain International statistics, international factoring volume grew 46% in 2010, a significant milestone considering the impact of the global recession. Almost all of the major consumer product export markets like China, Taiwan, Hong Kong and Turkey recorded double-digit export growth, led by China with a 66% increase.
An interesting statistic is the growth recorded in inter-Asian trade, which is trade within Asia. Taiwan and China experienced 78% and 51% increases, respectively, in import factoring volumes, illustrating the significant growth in consumer spending on the mainland.
However, the growth in international factoring can be viewed as more subdued when comparing 2010 volume to 2008 volume, which was a peak year in international factoring. Volumes increased 17% from 2008 to 2010, mainly due to the steep decline in Asian-manufactured consumer products imported into the U.S. and EU markets during the 2009 economic crisis.
Globally, the outlook for 2011 is quite optimistic. Actual international factoring volume for the first two months of 2011 increased nearly 62% over the same period the previous year. A portion of this is being influenced by the significant increase in the price of raw materials stemming from hyperinflation in certain soft and hard commodity categories, including the price of labor in major production centers like China. Even with the disruption to the supply chain caused by the devastating events in Japan and political upheaval occurring throughout the Middle East, it is anticipated that international trade, and in turn international factoring, will grow significantly in 2011.
ABFJ: We note that in 2010 and 2011, CIT has committed additional capital to both Trade Finance and Vendor Finance, and has taken several steps to optimize its balance sheet by retiring some of its more expensive debt and streamline its portfolio. That’s exciting news for your group. Can you tell us about that?
JD: Over the past year or so, we’ve eliminated more than $7.5 billion of high-cost debt and made strides in optimizing our portfolio and improving our funding flexibility. Last year, we closed a $650 million committed conduit financing facility, which was in addition to the $1 billion in liquidity the factoring unit was provided in the summer of 2009.
From a financial perspective, the CIT of today is a very different company than the CIT of 2009. CIT currently maintains one of the strongest Tier 1 Capital ratios among commercial banks. At the end of 2010, our Tier 1 Capital ratio exceeded 19% and our Total Capital ratio was 20%. We reported $11 billion of cash, and our book value increased to almost $9 billion.
ABFJ: What impact, if any, did CIT’s restructuring have on your factoring business?
JD: Our success in establishing ourselves as the leading factor in the U.S. has been based on our deep industry expertise, exceptional client service and longstanding relationships within the retail sector. While the restructuring did affect our business to some extent, we were able to minimize the impact through proactive communications with our clients, maintaining service levels and continuing business as usual.
ABFJ: How does CIT differentiate itself?
JD: We believe that CIT provides tremendous value to companies that are looking for factoring, as there are a number of solutions we can provide to companies. We can provide factoring only; we can factor the receivables and lend against the A/R; and if we are not able to lend to a company, we can still factor its receivables and assign the proceeds to the company’s bank.
For companies seeking only factoring — with no lending — we believe CIT provides the most comprehensive factoring services of any U.S. factoring company. We continue to provide the same high level of client service in factoring that we have always provided.
CIT Trade Finance specializes in factoring services. When companies come to CIT for factoring, we do not ask them to move their existing checking account, private banking relationship or cash management account. All of that can remain where it is. In Trade Finance, we specialize solely on the factoring business. We pride ourselves on having many relationships that span ten years or more. We can assure you that we continue to make every effort to provide solutions to meet our clients’ needs.
ABFJ: Is there anything you’d like to add? Is there anything we didn’t ask that we should have?
JD: I’m pleased that factoring continues to be a cost-effective solution for manufacturers and importers that sell to retail channels of distribution and that CIT continues to be a market leader in supporting both vendors and retailers, both vital parts of our nation’s economy.