By Armorel Kenna and Chris Staiti

Feb. 27 (Bloomberg) -- The collapse of IT Holding SpA, owner of the Gianfranco Ferre designer label, has sent ripples across Italy's fashion industry, threatening to take with it a host of seamsters, fabric suppliers and other couture houses.

The Milan-based company, whose Ittierre unit makes jeans and accessories under license for Italy's top designers including Roberto Cavalli and Versace, was put into bankruptcy protection yesterday after missing loan installments and failing to pay suppliers and royalties for as much as a year.

"The situation is extremely serious for the Italian fashion industry," said Carmine Pizzuto, a lawyer who represents about 40 companies that supply Ittierre. "A failure would mean thousands of people on the street."

This week, Cavalli canceled the show for its young-adult line at Milan Fashion Week, citing "the difficult situation" at Ittierre. Designers rely on the event to court orders for their fall/winter collections. After a meeting with government officials, textile workers and consumer groups last night, Industry Minister Claudio Scajola said Italy decided to aid the 70 billion-euro ($89 billion) industry and will present its first proposal by the middle of March.

‘Made in Italy'

"It's the government's intention to sustain the sector, which is central to the ‘Made in Italy' branding and to the whole Italian economy," Scajola said in a statement. Half of the industry's revenue comes from exports.

Italy's fashion industry employs about 800,000 people and counts on about 30,000 distribution companies, according to the Ministry.

Companies that supply fabrics and services to Ittierre haven't been paid for as many as 13 months, forcing some of their owners to take out loans, or even use their homes as collateral to meet the payroll, said Pizzuto. The companies he represents, among about 200 that supply IT Holding, are owed 80,000 euros to 1.6 million euros each, he said.

"The banks are threatening to take people's houses," he said. "People are desperate."

About 3,000 people throughout Italy count on IT Holding for their livelihood, according to CGIL, the biggest national labor union. Hardest hit is Isernia, the southern town of 21,000 people where Ittierre's factory is based. The company is the region's biggest employer after Fiat SpA, Italy's biggest carmaker.

Saving Isernia

"Isernia needs Ittierre to be saved whatever it takes," Mayor Gabriele Melogli said in a telephone interview. Ittierre's factory is a source of income to about 600 families there. "The province of Isernia doesn't have the means to absorb employees if there are layoffs."

Roberto Cavalli today said he pulled out of Fashion Week for the youth line because an insufficient number of clothes had been produced.

"I didn't go ahead with the Just Cavalli show because I wasn't in a position to do it with the glamour and spirit that I am used to doing my shows with," he said in a telephone interview. Cavalli said he has revoked his license with Ittierre and doesn't know how much exactly he's owed in royalties by the IT Holding unit.

"I think we have all canceled," Cavalli said referring to the other license partners of Ittierre. Diesel SpA is the most likely replacement, he said.

Licenses

Andrea Ciccoli, one of three government-appointed bankruptcy administrators, said today that IT Holding's production and sales are "back on track" after Ittierre received a 30 million-euro loan. He said C'N'C Costume National has confirmed Ittierre continues to hold the license to manufacture its clothing.

"If Ittierre loses the licenses, the value of the company will drop dramatically," said Davide Vimercati, an analyst at UniCredit Markets & Investment Banking in Milan. "It would really surprise me" if designers weren't looking for alternatives to Ittierre, he said.

Gianfranco Ferre SpA's fall/winter fashion show in Milan went ahead today.

While IT Holding's bankruptcy protection is the first for a Italian publicly traded fashion company since the financial crisis, it isn't for Chairman Tonino Perna. Pantrem SpA, a jeans maker founded by Perna and his brother Remo in the 1970s, went bust in 1993 after accepting millions of euros in local and federal government assistance. Remo Perna's GTR SpA went bankrupt a decade later after Prada SpA bought designer Helmut Lang and canceled its jeans line, which GTR produced.

Luxury Empire

In 2000, Tonino Perna envisioned creating an Italian luxury- goods empire to bring fashion, travel services and credit to wealthy consumers. He bought the European card business of Diner's Club that year, planning to hold an initial public offering. He sold it in 2003 to Citigroup Inc. to focus on the purchase of Ferre, which he acquired through a holding company before selling it to IT Holding for 161.7 million euros.

Financing the purchase was a 175 million-euro bond, which was later extended to 185 million euros. It was the crippling conditions of the bond that hampered IT Holding's ability to raise money in times of financial strife. Under the terms, the company was unable to sell shares, assets or units without turning the proceeds over to the bondholders.

Perna, through an outside spokesman, declined to comment.

IT Holding, which also owns the Malo cashmere brand and Plus IT accessories unit, missed a loan payment in October and an extension three months later.

Standard & Poor's cut IT Holding's long-term corporate credit rating and senior secured debt rating to D, or default, today. The ratings company expects a 10 percent to 30 percent recovery for bondholders in the event of a payment default, it said in a statement. On Feb. 9, Moody's Investors Service lowered its rating on the bonds to C, its lowest level, and downgraded the company's probability of default to D, signifying default on all obligations.

To contact the reporter on this story: Armorel Kenna in Milan at akenna@bloomberg.net; Chris Staiti at cstaiti@bloomberg.net