Money Matters, Simplified.
CIT poised for $3 bn deal with bondholders
by Neka Sehgal - July 20, 2009 - comments
CIT Group Inc., the commercial finance company, is in talks for $3 billion in financing from bondholders, in an effort to ward off bankruptcy
New York, July 20: Commercial lender CIT Group Inc. (Public, NYSE:CIT) appears to be on the verge of being rescued from the brink of bankruptcy. The century-old lender and its advisers are trying to arrange rescue financing to the tune of $3 billion to avert insolvency.
The lender to small and midsize businesses in a scramble to raise money during the past week is evaluating alternatives after failing to convince the US government for a second bail-out.
CIT gained the status of a bank holding company in December, so that it could draw $2.33bn of taxpayers’ money from the US government’s Troubled Asset Relief Program (TARP).
A deal with bondholders in the offing
The New York Times reported CIT was “close to a deal” with some of its largest bondholders for securing a $US3 billion loan which may enable the company to restructure its debt outside court.
Investment bank Houlihan Lokey was leading the talks with the bondholders, the largest of which is Pacific Investment Management, to thrash out a rescue financing deal before the markets open in the nation today.
Under the proposed deal with them, CIT would pay high interest rates, in a bid to procure time to make other changes needed.
The lender is expected to file for bankruptcy protection if the talks are not a success.
CIT’s financial woes
According to the economists and politicians, it would be the largest bank to collapse since Washington Mutual last autumn, and many dread that it could spell doom for the nation’s tottering recovery from a deep recession.
CIT suffered a liquidity crunch, and is straining under a $40 billion dollar long-term debt, according to independent research firm CreditSights.
About $1.1 billion of debt is due in August, followed by about $2.5 billion by the end of the year. It has lost close to $3.3 billion since the end of 2007. The company has $10 billion of debt maturing, which it needs to address in the year ending March 31, 2010.
Impact of bankruptcy
CIT’s problems came to light two years ago, when the chief executive Jeffrey Peek, deviated from its main business to expand into subprime mortgage, commercial customers and student loans during the credit boom.
Bankruptcy would have risk serious repercussions for many of CIT's small firms dependent on short-term finance, known as factoring. The bank accounts for about 70 percent of the U.S. market for this niche business worth $40 billion annually.
CIT's failure would add to the pressure on small businesses at a time when they have been laying off hundreds of thousands of jobs every month.
CIT (CIT, Fortune 500) shares have lost more than 80 percent since the beginning of June, and closed Friday at 70 cents.