Monday, July 20, 2009

Last Chance For CIT?

On CNBC: CIT Strikes Deal for $3 Billion Rescue to Avoid Bankruptcy

  • CIT Group's board is scheduled to meet on Sunday evening to consider a $3 billion financing deal from seven of the company's top ten bondholders, sources familiar with the talks told CNBC.

    The liquidity facility carries a 2.5-year term and portions will be available immediately. The funds should help the company stave off a chapter 11 bankruptcy filing at least in the short-term, the source said.

    CIT is also planning a cash tender offer for outstanding senior notes in August as part of a broader recapitalization plan.

On WSJ Bondholders Plan CIT Rescue


    CIT Group Inc. was close to securing $3 billion in last-minute rescue financing from its bondholders Sunday in a deal that should keep the struggling firm -- once the largest issuer of small-business loans in the U.S. -- out of bankruptcy court, people familiar with the matter say.

    The deal, which was being considered by CIT's board Sunday night, charges CIT very high interest rates, and it doesn't permanently fix the company's long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders' losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.

    If the deal is completed, it could help reduce CIT's debt load, strengthen its capital position and alleviate pressure on CIT to pay down $1 billion in debt that comes due in August. It may also preserve the U.S. Treasury's $2.33 billion investment made as part of the Troubled Asset Relief Program.

    The development appeared to vindicate U.S. regulators, who balked at appeals to help CIT. And it suggested that, unlike in recent months, private capital is available to plaster over cracks in the financial system.

    Still, CIT and its bondholders hope that their effort to stabilize the company will cause bank regulators to look more favorably on a CIT plan to transfer more of its loans from the holding company to its bank in Utah. CIT has trouble borrowing money, but its bank can finance itself by taking in deposits. To transfer more assets to the bank, however, CIT needs an exemption from the Federal Reserve and a nod from the Federal Deposit Insurance Corp.

    The final term sheet still needs to be reviewed by the various financial and legal advisers, said the people familiar with the matter.
    And there is the chance that a final deal could falter over last-minute negotiations.

    Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. (As of Friday, three-month Libor stood around 0.5%.) CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.

    The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.

    For years, CIT funded itself largely by selling bonds -- only to find itself in deep trouble when credit markets froze up amid the depths of the financial crisis a year ago. It has been trying to rely more on deposit funding from its bank, but the transition has been slow, and regulators are concerned about the risk involved.

    At least one analyst viewed the deal as a stopgap measure. "Even if they put together a deal today and postpone a bankruptcy filing, CIT may be back in the same place in the not-too-distant future because unemployment rates, business-loan delinquencies and corporate default rates are climbing," said Martin Weiss, president of Weiss Research, an investment consulting firm in Jupiter, Fla. "The outlook for the next six months looks pretty rough for many banks, including CIT," he said.

    Late Thursday night, CIT officials believed they had secured a $2 billion rescue-financing plan from J.P. Morgan Chase & Co. But that fell through by Friday morning, said these people.

    J.P. Morgan would have considered lending if CIT were first to seek bankruptcy protection, but the bank "couldn't get comfortable with a deal outside (bankruptcy) court," said one person familiar with the matter.

    CIT's advisers, which includes Evercore Partners, then launched talks with its bondholders, led by investment firm Centerbridge............

And the following article explains who and what CIT stands for: What is CIT, and what if it does fail?

  • By CANDICE CHOI The Associated Press - Published: July 19, 2009

    You may not have heard of CIT Group Inc., but there's a good chance you've shopped in stores that it helps keep in business.

    The New York-based bank is one of the nation's largest lenders to small and mid-sized businesses. Despite the scope of its customer base, however, CIT emerged from meetings with federal regulators Wednesday failing to secure the cash infusion it needs to avoid bankruptcy. In turning CIT Group away, the Obama administration is betting that any ripple effect from the company's demise wouldn't pose a critical risk to economic recovery.

    CIT Group is now rushing to raise billions of dollars in financing from debt holders, but Wall Street doesn't appear confident that the company will pull through. On Thursday, investors sold off shares and drove down the stock price 75 percent. As the company fights for survival, here are some questions and answers about how small businesses and the broader economy are affected by CIT Group.

    Q: First of all, what is CIT Group?

    A: It's a century-old company that primarily provides lending to small and mid-sized businesses. To a much lesser extent, it also provides advisory services and leases out property such as airplanes and rail cars.

    The company has been bought and sold a number of times over the years. Most recently, it was acquired in 2001 by Tyco International, which at the time was embroiled in an accounting scandal. To pay down debt, Tyco spun off CIT Group in an initial public offering in July 2002. CIT has been an independent public company since then.

    Q: Who does CIT serve?

    A: CIT says it serves more than 1 million business customers, most of them small or mid-size businesses.

    The company's clients run the gamut, but tend to be in industries considered riskier in the small business landscape, such as restaurants and retail. Dunkin' Donuts franchisees and Dillard's Inc. are among the company's clients.

    It's not clear what percentage of the country's small business lending market CIT Group holds, but the company is the ninth-largest commercial and industrial lender in the United States, according to Foresight Analytics.

    As of March 31, CIT Group held 1.7 percent of the $1.4 trillion in commercial and industrial loans on bank balance sheets.

    Q: What role do small businesses play in the broader economy?

    A: Small businesses provide about half of all private-sector jobs. According to the U.S. Small Business Administration, small firms generated 60 percent to 80 percent of net new jobs every year over the past decade.

    Small businesses — defined as having fewer than 500 workers — made up 99.9 percent of the 27.2 million businesses in the country in 2007, according to the SBA. Just 17,000 were large businesses.

    The odds aren't great for small firms, however. The SBA says that while two-thirds of new businesses survive at least two years, only 31 percent survive at least seven years.

    Q: If CIT files for bankruptcy, would its clients' credit lines be immediately shut down?

    A: That depends on the type of bankruptcy CIT would enter.

    To reorganize under Chapter 11 bankruptcy, CIT Group would need to line up financing sources to enable operations to continue. In the event that financing can't be found, however, the company might have to liquidate its business and close down under Chapter 7 bankruptcy. That would mean clients would likely not be able to tap credit lines.

    The impact of the latter scenario would be diminished since CIT has already been cutting back on lending in recent months. In March, CIT had $5.3 billion in credit lines to customers, down from $6.1 billion at the end of 2008.

    Q: Where else could CIT's clients get loans if the company failed?

    A: There are 8,300 banks in the U.S., most of them healthy enough to offer loans to small businesses, said Bob Seiwert, senior vice president of the American Bankers Association's Center for Commercial Lending and Business Banking.

    "The market over time will fill the void. The challenge for CIT borrowers would be finding new lenders in a time frame that works for them," Seiwert said.

    Since many of CIT's customers are in riskier industries, Seiwert said it could be harder for them to find loans given the tight credit market.

    Q: How did CIT get into its current predicament?

    At the height of the credit bubble, CIT Group made the mistake of straying into subprime lending and student loans, said Kathleen Shanley, an analyst with corporate bond research firm Gimme Credit.

    The company quickly recognized its mistake and pulled back from those segments more than a year ago, but the damage was done. CIT tapped much of its own credit lines in March of last year, and ever since has had trouble finding funding, Shanley said.

    The problem was exacerbated by CIT's reliance on credit markets for financing, said Matthew Anderson, an analyst with Foresight Analytics. Unlike traditional banks, CIT can't lean on customer deposits when it needs money.

    And now, CIT is facing $7.4 billion in debt that's due in the first quarter of next year.

    At the same time, CIT has a higher delinquency rate on its loans than other banks. CIT's delinquency rate for commercial and industrial loans was 5.4 percent at the end of the first quarter, compared with an average of 3.5 percent for all banks in the country, according to Foresight Analytics.

    Q: What are the arguments for letting CIT Group fail?

    A: CIT already received $2.3 billion in federal aid last December after converting to a bank holding company. CIT and its representatives have warned that a failure to provide additional government help could prove fatal to the small businesses that rely on it for money.

    "The cost of a cash infusion is less than the negatives their failure would cause," said Scott Talbott of the Financial Services Roundtable, which represents CIT and other big financial firms.

    But CIT is one-eighth of the size of Lehman Brothers, which went into bankruptcy last fall after suffering massive credit losses. And Wall Street's concern about CIT Group was relatively subdued — major stock markets didn't really move much in response to the news about the company during the regular trading session.

    Optimism about good earnings from big technology companies ultimately outweighed the concerns and pushed the market higher.

    In other words, there doesn't seem to be widespread panic that a failure at CIT would do serious damage to the markets or the economy.