CIT Group files for bankruptcy
New York City In one of the biggest bankruptcy filings in U.S. corporate history, CIT Group Inc., the 101-year-old commercial lender that saw its funding dry up in the credit crunch, filed for bankruptcy in an effort to cut $10 billion in debt following a failed debt exchange and U.S. taxpayer bailout. The company provides badly needed credit to thousands of small and mid-sized businesses, and is a critical part of the flow of capital in the retail sector.
CIT listed $71 billion in assets and $64.9 billion in liabilities in a Chapter 11 petition Sunday in U.S. Bankruptcy Court in Manhattan. The Treasury Department said the government probably won’t recover much, if any, of the $2.3 billion in taxpayer money that went to CIT.
CIT stressed that its lending operations will continue to operate as it proceeds through bankruptcy with the hope of shedding $10 billion in debt. Chairman and CEO Jeffrey M. Peek said the company’s prepackaged reorganization plan “will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy.”
But retail groups and analysts warn that the case will likely add to the instability in the retail sector. CIT is an important source of capital, working with 2,000 vendors that supply merchandise to more than 300,000 stores. About 60% of the apparel industry depends on CIT for financing, according to the Associated Press.
CIT expects to emerge from bankruptcy by the end of the year, but a dragged-out case or any glitches could further disrupt the already tight credit markets for retailers, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company that is partly owned by Kurt Salmon Associates.
The lender plans to exit court protection next month after bondholders voted in favor of a “prepackaged” plan. None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, and operations will proceed as normal, CIT said in a statement.
“Short term, it’s going to cause some difficulties for startups and smaller borrowers,” said Jean Everett, a partner at Hiscock & Barclay LLP focusing on financial institutions and lending. “CIT lent across so many sectors, it’s sort of difficult to predict how it’ll affect each sector.”
CIT asked the court to schedule a confirmation hearing on its reorganization plan as soon as possible after Dec. 1. Shareholders may be wiped out as common and preferred stock is likely to be canceled when the company ends its reorganization.
CIT asked for court permission to borrow $500 million from Bank of America Corp., saying the loan would fill a financing “void” after other lenders refused to extend it more credit.
The company has $1 billion from investor Carl Ichan to fund operations while it reorganizes. The credit line, to be drawn on until Dec. 31, will be a so-called debtor-in-possession loan. It also expanded its $3 billion credit facility by another $4.5 billion on Oct. 28.
Craig Sherman, VP government affairs at the National Retail Federation, thinks the industry “dodged a bullet on the holiday season” for the most part, because most merchandise is in stores’ distribution centers. However, he said CIT’s woes could throw a wrench in ordering for the important 2010 spring season. NRF officials say that as stores prepare for a rebound in consumer spending next year, access to credit is very important.
Harold Reichwald, co-chair of law firm Manatt, Phelps & Phillips’ banking group, said that CIT’s case will likely force the company’s customers to look elsewhere for financing.
“If I was a small businessman, I would say to myself, ‘I have to find alternatives,'” Reichwald said. “In this marketplace, there isn’t [sic]a lot of alternatives.”
Turning Up the Heat on Utility Management
Not every energy management strategy has to be complicated—sometimes it’s as simple as turning off the lights. And thousands of dollars can be saved at the store level when an effective, and clearly communicated, energy conservation plan is in place. Senior editor Katherine Field talked with Rick Sievertsen, VP client solutions for Spokane, Wash.-based energy expense management firm Advantage IQ, about specific ways retailers can dial up utility savings.
How has the downturn affected retailers’ actions with regard to utility bill management?
Retailers have gotten very interested in utility expense management because, very simply, it will help the bottom line. But retailers are also looking at opportunities for redeploying personnel, which is opening up opportunities for outsourcing utility bill management.
How does a retailer justify outsourcing utility bill management?
It is critical that a retailer look very carefully at the value proposition. Billing corrections save money, eliminating late payments saves money, making sure each meter is on the proper utility rate reduces expense. The data can be used to prioritize where the high-cost, high-consumption opportunities reside.
Where do you find most high-cost, high-consumption opportunities?
That, of course, varies by store and by location. We use the data to pinpoint where we should put our efforts. Where the price is high, we look for ways to improve the supply contract or the load factor at the site to qualify for better pricing. Where the consumption is high, we look for opportunities for improved efficiencies.
What are some simple ways that retailers can find efficiencies?
There is a lot of opportunity in low-cost, no-cost energy conservation. Turn lights off when a space isn’t occupied. Turn off office equipment when it’s not in use. Let your building automation systems do their job. Don’t override thermostat settings. Educate your employees on what they can do to help improve energy efficiency—provide them with information, show them where their facility stands among the portfolio, and show what the results can be when they help their facility perform better.
How do you create a specific plan for managing utility expense?
We start with the data. We use utility bills because every site has a utility bill, but not every site has a building automation system or a fancy meter. We first confirm the accuracy of the bill, and we then separate the cost components from the consumption components. Too many times people make the mistake, when the cost is high at a facility, to start making corrections without knowing whether it’s the price or the consumption that is high. Measure price and consumption separately, then benchmark facilities on both price and consumption from high to low. Spend your time on the ones that are high, because that’s where you’ll get the biggest bang for your buck.
On the supply side, we make sure that if the retailer is in a deregulated market, it is buying from the best supply source. We also make sure it uses the right risk management techniques to manage the volatility of its energy price, and that it’s contracted under the best possible terms and has an ongoing program in place to continually monitor that cost of energy.
On the consumption side, we reach out to high-consumption sites to find out what’s going on. What type of equipment is being used? How old is it? How big is the store? Is there anything unique about it that would lead to higher energy consumption? And then we let our certified energy managers work with those store managers to try and identify what is causing the problem.
What can a typical retailer expect to save on a per-square-foot basis if utilities are properly managed?
Retailers are all over the board. On average, they spend from $1 to $3 a square foot on energy. We see savings of 5% to 15% easily, so it could be anywhere from 5 cents to 50 cents a square foot depending on where they are today.
Walgreens’ Healthcare Model
The healthcare reform debate has reached a crescendo in Washington as Congress and the Obama administration wrangle over cost and coverage issues. But Walgreen Co. isn’t waiting. Neither are the growing numbers of U.S. employers that are turning to the drug store and health services giant for help in dealing with their mounting employee healthcare costs.
For more and more of those major corporations—count The Walt Disney Co., Harrah’s and Caterpillar Inc. among them—Walgreens has come to mean a lot more than the drug store at the corner of Main Street. Armed with a national network of community pharmacies and a growing arsenal of healthcare operations in such areas as specialty pharmacy, home infusion and workplace clinics, Walgreens is reinventing itself as a fully integrated, cost-effective health and wellness solution for the nation’s employer-funded health plans. Taken together, these approximately 8,000 points of care are becoming increasingly attractive options for big healthcare payers looking to lower costs and improve the health outcomes of their employees.
Presently, Walgreens’ growing list of employer clients numbers more than 185 U.S. companies and more than 375 worksite-based health centers that take on a variety of forms.
“We’re pioneering new approaches to achieve better healthcare outcomes,” Greg Wasson, president and CEO, Walgreens, explained in a recent interview. Those new approaches, he said, “will integrate capabilities across all of our platforms, including pharmacies, retail clinics, call centers and mail service, to enable patients to better control their conditions.” And increasingly, Wasson noted, the company is “taking our expertise directly to employers’ campuses.”
Its message to the healthcare marketplace and managed-care community is that Walgreens—with its nearly 7,000 drug stores with pharmacies in all 50 states, roughly 400 Take Care in-store health clinics, the nation’s largest home-infusion and fourth-largest specialty pharmacy businesses, more than 100 hospital-based and health-center pharmacies, and hundreds of worksite health centers—can be a convenient, market-based solution for a fractured healthcare system whose costs are reaching, as Wasson put it, “unsustainable” levels.
“The sands are shifting in our industry because of health-care reform and changes taking place,” Wasson explained. “And the good thing is, when the sands do shift, it certainly causes uncertainty, but it also creates openings.”
Those openings create a huge opportunity for community pharmacists to step up and be recognized as a non-physician healthcare provider, according to Wasson.
With the health system in dire need of cost-saving reforms and family-practice physicians increasingly overwhelmed by patient loads, Walgreens is ideally suited to provide solutions, he asserted.
“There’s a shortage of primary-care physicians,” Wasson said. “Our community pharmacists and the other clinicians we employ, both in stores and on employers’ campuses, can play a big role in filling the gap in primary care, as well as lowering costs.”
One big way to cut healthcare costs for big companies such as Disney, which cover much of the healthcare outlays for thousands of employees, is for Walgreen’s community, specialty and health-center pharmacists to work with those employees to improve their compliance with their prescription drug therapy.
“Nearly 50% of patients on chronic medications are non-compliant in some form or fashion within four months of starting a new medication,” Wasson said. “We’ve got to be able to show we can indeed improve that compliance and save the medical system costs.”
Central to Walgreens’ mission to reduce costs and improve outcomes for companies that employ many workers will be its ability to integrate its community, specialty and employer-based pharmacies and clinical-care capabilities. To that end, the company has unveiled a major new initiative to bring together all its pharmacy and patient-care capabilities under a single service and marketing umbrella on behalf of employer-based health plan sponsors.
That program, called Complete Care and Well-Being, is an “employer-centric” pharmacy, health and wellness program that puts Walgreens pharmacies and Take Care health clinics directly on employer campuses and worksites. It is designed to reduce healthcare and prescription costs for employers across the country.
The program, according to Wasson, allows a ground-based approach with clinicians in the center, touching employees daily, and a clinician, nurse or pharmacist sitting across from them, connecting to whatever benefit design or structure they have in their current program, to make it much more effective.
“Our goal is to make this a one-patient, one-employer, one-employee view of Walgreens,” Wasson said. “We want the employer to understand that Walgreens can bring all these solutions to bear.”
Employers appear to be embracing that message. Disney, for instance, hosts a massive, Walgreens-operated healthcare center and exercise facility for Disney World employees in Orlando, Fla.
While on-site facilities can scale up or down depending on the scope of services provided, the number of employees covered and the general age of the employees, generally speaking, for every $1 a company invests in worksite-based health care the savings is anywhere from $2 to $4.
Partnerships between big employers and health and pharmacy providers such as Walgreens are likely to grow as the search for ways to defray mounting health costs intensifies. Most recently, Caterpillar contracted with Walgreens in a long-term arrangement that will offer the employer transparent prescription drug pricing. The deal is expected to lower drug costs for the world’s largest manufacturer of construction and mining equipment—and reduce out-of-pocket expenses for its 70,000 employees, as well, by offering many commonly prescribed generic medicines at no copay to the company’s health plan members.
The two companies also agreed to explore, through Walgreens’ Complete Care and Well-Being program, additional ways to extend integrated healthcare and pharmacy services to Caterpillar employees. Separately, Walgreens said it will also provide Caterpillar health plan members a “significant” discount on all Walgreens branded and non-branded products.