CIT cuts credit to Mervyns

CIT, the large specialty lender that has been walloped by the sub prime mortgage mess, has stopped approving credit for about $40 million in orders to Mervyns, a struggling sunbelt department store chain, Fortune has learned.

The development is yet another example of how Wall Street’s problems are impacting Main Street. As the credit crunch snakes its way through the economy, banks are growing stingier with lending. Among the casualties are Talbots and Sears, which both saw credit lines suspended in recent weeks. At the same time, debt-laden consumers are curtailing what they spend at the mall, resulting in dozens of bankruptcy filings, including those of furniture makers Bombay and Levitz as well as gadget retailer Sharper Image.

The result is a squeeze for retailers unlike any in recent history. The most vulnerable are those like Mervyns, which was already on shaky ground before the economy turned south. Since former parent Target (TGT) sold the company in 2004 to a group of private equity firms that include Sun Capital Partners and Cerberus Capital, Mervyns has found itself under siege.

There have been massive layoffs, store closings and management upheaval. In March, Mervyns hired John Goodman, a former Levi Strauss executive known for turning around the Dockers brand, as its chief executive, the third person to hold that post in as many years.

As a private company, Mervyns no longer reports financial data. According to the research firm Hoovers, Mervyns, based in Hayward, Calif., had $2.5 billion in sales in 2007. Most of its stores are located in sunbelt states that have been hit hard by the housing meltdown. “Mervyns has not been performing well,” said one source.

While other large lenders, Wells Fargo (WFC) and Milberg among them, have not curtailed credit to Mervyns’ suppliers, “the action by CIT is causing them to take a closer look,” this person said.

CIT (CIT) is one of the largest lenders to Seventh Avenue firms. Its ill-fated foray into sub-prime mortgages — which has forced the lender to sell assets and draw down credit lines — has weighed on those in the fashion industry that depend on CIT’s ability to extend credit.

Without a guarantee from CIT, small and mid-sized firms are loath to ship directly to retailers, especially troubled ones, for fear of not being paid. It was unclear how much of CIT’s belt tightening was the result of its own financial troubles, as opposed to a growing concern over Mervyns health.

CIT spokesman Curt Ritter declined to comment on the firm’s relationship with Mervyns or other retailers.

Mervyns Chief Financial Officer Chuck Kurth also declined to comment specifically on the company’s relationship with suppliers or financial partners.

But he did say that only one-fifth of Mervyns business is done through specialty lenders like CIT, known in industry parlance as factors. The rest of the retailer’s merchandise comes directly from large companies like Nike and Levi Strauss. As such, Kurth added, “we are very comfortable with our liquidity position.”