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

• By JEFFREY MCCRACKEN and SERENA NG
  
  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?
  
  A: 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.
  
  Source: here

What's Next For CIT?

From CNBC: http://www.cnbc.com/id/31926789

• "Discussions with government agencies have ceased,'' the New York-based company said in a statement. "There is no appreciable likelihood of additional government support being provided over the near term.''

From GlobeAndMail Troubled CIT won't get bailout from Washington

• For days now, the commercial lender has argued it is too big to fail, and warned that if it was forced to seek bankruptcy protection, hundreds of thousands of small businesses would be left in the lurch, threatening the country's fragile recovery.
  But Washington's 11th-hour refusal to mount a rescue suggested the opposite: That lawmakers view CIT as too small to save, and that their growing exasperation with bailouts more than offset any fears they had about a larger ripple effect in the economy.
• CIT said its board is examining alternatives amid a cash crunch, but the prognosis looks grim. Rating agency Standard & Poor's predicted this week that CIT would teeter into bankruptcy if it could not secure further government support.
  
  The company already received $2.3-billion (U.S.) worth of aid money last year, but that is not nearly enough to help it repay looming debts and finance its lending operations. Customers have recently drawn down their lines of credit by more than $750-million, exacerbating the company's cash woes.
  
  CIT has $75-billion in assets, making it a fraction of the size of Lehman Brothers, which the government allowed to fail last September despite its sizable $639-billion in assets.
  
  Yet despite CIT's diminutive stature, its fate has become highly politicized, not least because it is seen as an important source of funding for the engine of the American economy: small and mid-sized businesses.
  
  CIT told Washington that 760 manufacturers and more than 300,000 retailers – along with several National Hockey League teams – could suffer a “crisis” if it did not receive a lifeline.
  
  That spurred several members of the U.S. Congress to plead for a bailout on its behalf.
  
  Barney Frank, chairman of the House financial services committee, said earlier yesterday he hoped the government could come up with a structured aid package for CIT.
  
  “If CIT doesn't get structured help, then it will have a very negative effect, I'm told, on small businesses around the country,” he said.
  
  U.S. President Barack Obama, however, appears willing to gamble that other banks will step in to fill the lending void, and take on CIT's stranded customers.

Chatter is out that Could Goldman pinch CIT!. Yes Goldman Sachs had 3 Billion worth of credit extended to CIT and the following article suggests that Goldman would not be hit.

• That’s because Goldman’s lending facility is basically a fully-collateralized repo facility. Any money drawn down by CIT is collateralized with physical collateral. That is, not securities of unknown value but things like real estate and aircraft. In addition, Goldman has taken out a small amount of credit default swaps intended to cover any decrease in the value of the collateral. ( source: http://www.businessinsider.com/discovered-how-goldman-hedged-its-exposure-to-cit-2009-7 )

See also That CIT Bailout Delima Is No Small Issue

I chuckled remembering how one declared that one should hold stocks for decades (yeah, twenty or thirty years) in an investment. Ideally it is a yes. However, there are so many exceptions to such a simplistic rule. And common sense rules over these exceptions. Holding long term does not solve a wrong stock selection. Holding long term does not help the investor if the business of the stock fails.

Here's the chart of CIT since 2002. It's only 17 short years.

Would this be the start of the next crisis? Well, here's another cracker from Jesse: Derivatives Crisis: More Bailouts On Deck?. He highlights an article featuring Mark Mobius.

• “Political pressure from investment banks and all the people that make money in derivatives” will prevent adequate regulation,
• The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product.Looming Crisis
• “Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.
• A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.
• “Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore.

That CIT Bailout Delima Is No Small Issue

From CNBC, Crisis Flares Anew as Lender CIT Seeks Federal Aid

• In a sign the financial crisis isn't over, CIT Group, the No. 1 lender to small and mid-sized U.S. businesses, is scrambling to get help from the federal government.
• The government may have good reason to talk with CIT. Some analysts suspect a collapse of the company, whose 1 million clients include big names from the franchisee of Dunkin' Donuts to retailer Dillard's, could deal a devastating blow to the economy by cutting off financing just as businesses need it most.
• That in turn could force thousands of small and medium-sized companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery.
• "They'd have to lay people off, downsize and maybe shut their doors," independent banking analyst Bert Ely said of CIT's clients. "It would hardly be positive for the economic recovery
• "If CIT were to go away, it would take a financing option away from our franchisees who want to buy stores or expand their networks," said Michelle King, spokeswoman at Dunkin' Brands, parent company of the Dunkin' Donuts chain.
• For the apparel industry, a collapse of CIT would have "near cataclysmic," consequences for its small to mid-sized clients, said Andrew Jassin, co-founder of Jassin-O'Rourke Group an apparel consulting company.
• The retail and apparel industries, which also include CIT clients like Dillard's and Bon-Ton Stores, is preparing for the critical back-to-school selling period and is in the midst of ordering merchandise for the holidays.
• "This could affect the lifeblood of the flow of goods to the stores," said Vincent Arscott, senior director of Fitch Ratings.
• Some analysts likened CIT's dilemma to a high-stakes game of chicken. They suggested that hiring the bankruptcy law firm was designed to pressure the government to step in with help.
  
  But by rescuing CIT, the administration may have to rethink whether to commit more taxpayer money to other firms that get into trouble or simply let them fail.
  
  If the government turns its back on CIT, "what does that say for ... other companies that the government has given the backstop to?" said Jesse Litvak, a trader at Jefferies.
  
  CIT, which in April posted a bigger-than-expected first-quarter loss, has been hit hard by the ongoing credit crisis as investors have shied away from purchasing all but the safest forms of debt, leading to a near disappearance of funding options.
  
  Unlike banks that rely on deposits for money, CIT gets funding by selling commercial paper and other types of debt.
  
  Without access to the TLGP program, CIT would have to find alternative funding that would likely need to be secured by its assets. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.
  
  CIT's troubles will make it harder to refinance that debt in coming months, raising fears that it could default.

On Chicago Tribune CIT woes don't bode well for holiday

• CIT is a major cog in making sure orders get paid for and delivered to stores. Without CIT, retail shipments for the critical holiday shopping season could be in jeopardy and, in turn, set off a new wave of bankruptcies among retailers and vendors.
• Vendors that sell to Wal-Mart and Target as well as to smaller independent retailers rely on CIT for factoring services.
  
  Most of the vendors are mid-size manufacturers of apparel, textiles, furniture, home furnishings and electronics that generate less than $50 million in annual sales, according to CIT.
  
  "They are generally not very well capitalized," said Jonathan Lucas, chief sales officer at CIT, in a transcript of a May interview conducted at the company as part of a financial education series. "They do not have alternative sources of capital. We provide that source of capital."
  
  Most experts agree that without CIT, vendors will have to scramble for funding that is hard to come by in a tight credit market. But there is little consensus on the importance of its role in keeping the supply chain moving.
  
  "We believe that should CIT cease lending, probably a good portion of its lending done to creditworthy clients could be assumed by another bank," CreditSights, a New York-based research firm, said in a report Monday.
• "It's terrible for everybody," said Homi Patel, chairman and chief executive of Hartmarx Corp., the apparel manufacturer that filed for Chapter 11 in January and is being sold to a private-equity group.
  
  Hartmarx doesn't rely on CIT, Patel said. For vendors that do, it is a lifeline, especially in tough economic times.
  
  "If vendors don't have the advance on orders received from retailers, then they don't have cash to run the business," he said. "And if they don't have cash to run the business, a retailer won't place orders with them. It's a vicious cycle."

On the Globe and Mail Washington faces CIT bailout dilemma

• At a glance, CIT appears too small to really matter – $75-billion (U.S.) in assets and ranked 26th in the country. Experts and regulators say its demise would pose no systemic risk to the banking industry.
  
  But CIT happens to be a major player in the business of providing loans to small businesses, a sector considered crucial to reviving the job market and lifting the United States out of recession. In its pitch for government aid, the New York-based lender has argued that a collapse would put 760 manufacturers at risk and “precipitate a crisis” for 300,000 retailers.
  
  So the question now is, can the U.S. government afford to let CIT fail?
• CIT is facing a looming cash shortage as several series of bonds mature. Debt rating agency Standard & Poor's warned yesterday that the lender could go bankrupt without government aid.
  
  The case for a bailout is dubious, according to bank analyst Kathleen Shanley of GimmeCredit.com, a research firm that specializes in corporate debt. The government has already let much larger banks fail – Lehman Brothers ($639-billion in assets) and Washington Mutual ($309-billion in assets), which was seized by regulators last September and sold to JPMorgan Chase.
  
  The reality, according to Ms. Shanley, is that the FDIC “waiting room” is filled with troubled banks just like CIT, many just as deserving.
  
  “There is a long list of other troubled banks awaiting regulatory attention, some with more insured deposits at risk than at CIT,” Ms. Shanley said. “It may be time for regulators to admit that not all bank holding companies should be saved.”
  
  She pointed out that other business finance companies have failed “with no serious repercussions.”
• Barry Ritholtz, a market strategist with Fusion IQ, said a rescue for CIT would send the message that just about any company qualifies.
  
  “Bailing out CIT will make a mockery of systemic risk, as if it wasn't already subjected to humiliating abuse as an economic concept,” he argued.
• CIT boasts roughly a million customers, everything from daycare centres to Dunkin' Donuts and several National Hockey League teams. But analysts said its lending supports less than 1 per cent of all U.S. retail and manufacturing businesses.
  
  CIT may not be big, or systemically vital, but it has some powerful defenders in the U.S. Congress, where the plight of small business is a growing political issue.
  
  “If they could no longer lend, it would cause disruption across the country to countless small business,” Carolyn Maloney, a New York Democrat and chairwoman of the joint economic committee of Congress, said in a statement.

Long term investors getting creamed at CIT!