CIT Gets A Lifeline

Last week it seemed that CIT (CIT) was on the verge of entering bankruptcy protection after the Obama Administration drew a line in the sand with respect to the federal bailout for troubled financial firms.

CIT had previously received $2.3 billion from the Troubled Asset Relief Program (TARP) last fall, and the government could have lost its investment if the company did seek bankruptcy protection. CIT is one of the nation’s largest lenders to small and mid-size businesses.

However, following the weekend-long negotiations with six key bondholders (including a PIMCO bond manager), it appears there is agreement upon temporary financing terms. CIT would receive $3.0 billion at an initial 10.5% interest. As a result, CIT could be able launch a debt exchange offer to free itself from upcoming debt maturities.

This financing deal could also give CIT time to complete a plan to transfer loans to its Utah-based banking subsidiary, which would then be able to finance them through a more stable funding base.

It is perceived that if CIT were to fail, a significant number of consumers and small and mid-sized businesses could be cut off from financing — forcing companies to dramatically reduce overhead or shuttering operations, thereby driving up unemployment and dashing hopes for a swift economic recovery.

To put it context, CIT is a short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation, with approximately 60% of the apparel industry depending on CIT for financing.

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