Small-Business Lender CIT Strikes Deal With Creditors to Avoid Bankruptcy
Tuesday, July 21, 2009
The troubled small-business lender CIT Group said Monday that some of its creditors will provide loans of up to $3 billion, allowing the company to forestall a bankruptcy filing that could have cut off critical funding for thousands of its customers.
The deal, which gives CIT time to negotiate a broader agreement with the creditors, shows that financial markets are regaining the strength to address problems without government help.
CIT had verged on bankruptcy over the weekend after the Obama administration denied its pleas for a second round of federal aid, raising concerns that thousands of small businesses might lose access to critical funding -- and that the government could lose a $2.3 billion investment in the company.
The rescue by private investors allows the administration to avoid both the political consequences of a bailout and the economic consequences of a CIT bankruptcy.
"We are pleased that CIT is in a position to continue to serve our valued small-business and middle-market customers," Jeffrey Peek, the company's chief executive, said in a statement.
But the respite could be short-lived. Financial analysts warned that CIT still must find a replacement for its traditional reliance on funding from Wall Street. Furthermore, the new loans increase a debt load that CIT already cannot afford to repay.
"The deal is a negative for bondholders as it does not fix the underlying problem and layers in more secured debt," analysts for CreditSights wrote in a note to clients. "Without a viable funding model, we believe CIT may still be at risk of filing for bankruptcy."
The New York-based CIT provides financing to about 1 million customers, as varied as clothing makers in Los Angeles and Dunkin' Donuts shops. The company historically funded its lending by selling bonds on Wall Street, but it fell into trouble after investor demand dried up two years ago. The company now faces a critical series of deadlines to repay debts, beginning with about $1 billion due in August.
CIT launched a public campaign in recent weeks to secure additional help from the government, in particular seeking permission to participate in a program that helps companies borrow money from investors. But the Federal Deposit Insurance Corp., which operates the program, has not approved CIT's application over concerns about the company's viability.
Last week, the government told the company that it would not provide additional support. CIT then told its investors that they faced a choice: providing more money or taking their chances on collecting in bankruptcy court.
On Sunday, a group of creditors agreed to lend the company up to $3 billion. Sources said the company was forced to accept an interest rate above 10 percent.
In announcing the deal Monday evening, CIT also said that it would immediately offer to repay holders of the debts due in August at a rate of $825 for every $1,000 in debt.
The company must then convince other creditors to accept partial repayments. Financial analysts said in some cases it may even offer shares of common stock in lieu of repayment.
The creditors would lose much of their investments but would profit if CIT's shares eventually recover. Other troubled firms, including the auto lender GMAC, have used versions of this approach in recent months, arguing to creditors that the alternative is to risk losing even more.
Even if CIT survives, the company's lending is in steep decline. The Coleman Report, an industry publication, said last week that CIT's originations of government-guaranteed small-business loans in the past nine months fell 88 percent from the corresponding period a year earlier. The total volume, $66 million, dropped the company from its position as the nation's largest small-business lender for the first time in nine years.
An Alabama hardware supplier said Friday that it was filing for bankruptcy protection "due to difficulties accessing funds" from CIT. The company, Moore-Handley, said it owed CIT about $17.5 million and had been unable to borrow more.