Fashion brands gamble on tariff refunds as government delays
The Supreme Court’s February ruling striking down Donald Trump’s IEEPA tariffs should have been a windfall for fashion brands. Instead, it’s created a financial limbo, with billions of dollars in refunds held up by bureaucratic delays and a burgeoning secondary market where hedge funds are snapping up claims at a steep discount.
The rise of tariff claim trading
The situation is complex. Fashion brands, having collectively paid billions in import duties, are now facing a stark choice: accept a discounted cash offer from hedge funds or wait, with no guarantees, for federal authorities to process the refunds. King Street Capital and Oppenheimer are among the firms aggressively courting importers, effectively transforming government obligations into tradable assets. This hasn’t just become a tool for distressed brands; larger companies with sophisticated treasury functions are also participating, driven by a simple desire for liquidity and a recognition that relying on the government’s timeline carries significant risk.
Neil Saunders, managing director of retail at GlobalData, succinctly put it: “This is very much a ‘bird in the hand is worth two in the bush’ mentality.” The hedge fund pitch is familiar to an industry accustomed to factoring – converting future receivables into immediate cash – but the scale of this market, fueled by a government backlog, is unprecedented.
A cape-tivating solution?
US Customs and Border Protection (CBP) recently announced that its Consolidated Administration and Processing of Entries (CAPE) system is on track to begin issuing refunds by early June, with 85% of the claim portal component already assembled. However, the rollout is phased. Phase 1 will cover roughly 63% of import entries, leaving the remaining 37% – including entries flagged for reconciliation or subject to ongoing protests – deferred to later, as-yet-unspecified phases. Even for qualifying entries, a 45-day processing window remains after a CAPE declaration is accepted, meaning immediate payment is unlikely.
The situation is further complicated by the fact that entries covered by open protests are explicitly excluded from Phase 1. Legal counsel have long advised importers to file protests, and this development throws a wrench in those plans, requiring a reassessment of which entries to protect.
The fashion industry's unique perspective
The fashion industry's relative comfort with this claim-trading market isn’t random. For decades, apparel and accessory brands have routinely sold their accounts receivable to factors. This IEEPA tariff refund market represents a logical extension of that model. Eric Fisch, senior vice president at HSBC, emphasizes that “Liquidity is always better…having liquidity puts you in a stronger competitive position.”
Gary Wassner, CEO of Hilldun, highlights the cash-flow challenges facing the sector. “All the costs of design and production are incurred many months before merchandise is shipped to retailers,” he explains. “The tariff refunds are predicted to take a long time to receive—perhaps two years, if they are ultimately paid back at all.” The prospect of refunds, even if repaid with interest and penalties, is a welcome recovery, particularly for smaller companies navigating industry headwinds and uncertain consumer spending.
Shareholder scrutiny and class-action threats
Publicly traded companies are largely avoiding the claim-trading market, wary of the reputational implications of accepting a fraction of what they’re owed. However, privately held brands have received unsolicited offers, prompting some to consider the market value of their receivables.
Adding another layer of complexity, a growing number of class-action lawsuits are targeting brands that raised prices to offset the tariffs, potentially exposing companies to reimbursement claims if refunds are eventually returned. The success of these lawsuits may hinge on how transparently companies communicated tariff-related cost increases to consumers.
As Steve Lamar, president and CEO of the American Apparel & Footwear Association, aptly stated, “These refunds need to be returned to the importer of record fully, quickly and automatically.” The market’s volatility underscores the urgent need for clarity and efficiency in the government’s refund process.