CIT's Subprime Woes May Impact Dell, Others

From Friday March 28th, reprinted from The Monitor , the publication for the Equipment Leasing Professional.........With Commentary at the end.

The subprime crisis has indirectly caught up with Dell, Avaya and Microsoft based on CIT's vendor finance relationships with these top tech companies.

Dell has contracted with CIT since 1997 to provide its customers with the financing of Dell product purchases. About a tenth of Dell's sales last year involved CIT in some way.

Given CIT's recent woes, Dell could be on the hook for all of the $455 million in outstanding loans CIT facilitated for Dell customers, should CIT go the way of other financial services companies felled by their subprime investments.

CIT currently offers finance programs for Dell's customers in Canada and in more than 40 other countries throughout Europe, Asia, Latin America and the South Pacific. CIT continues to have the option to provide funding to Dell's financial services division through January 2010.

The relationship between Dell and CIT dates back to 1997, when the two created a joint venture so Dell could offer business-customer financing. Two years into operations, the joint venture also began lending money to consumers.

Avaya's agreement with CIT was recently extended through September 2009, pursuant to a renewal provision in the agreement. Microsoft’s vendor financing relationship began in July 2006, when CIT began financing deals for Microsoft products sold in France and Switzerland. Last year, their relationship was expanded to include work with Microsoft customers in Germany, Italy, South Korea and the UK.

Commentary: Conventional vendor finance arrangements by Dell would have CIT or another company finance their customers and pay them their invoice price in cash. Had Dell done this conventional arrangement, they'd get their full price, just like a cash deal, with NO credit risk. No potential 'on the hook' for $455 million and no risk to them should a client not pay.