CIT Is Near Deal for $3 Billion Loan to Avert Bankruptcy

By MICHAEL J. de la MERCED
Published: July 19, 2009
The CIT Group, one of the nation’s leading lenders to small and midsize businesses across the country, was close to a deal Sunday afternoon with some of its major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.
The company spent the last week appealing unsuccessfully to Washington regulators for more financial help while scrambling to try to raise as much as $3 billion from investors. Still, ratings agencies slashed its debt and its stock was in a virtual free fall. If CIT does not reach a deal by Monday morning, it plans to file for Chapter 11 protection as soon as Monday afternoon, people briefed on the situation said.
Under the terms of the proposal, CIT would receive $3 billion from some of its main bondholders. The money is meant to give the company several weeks to set up an exchange of bondholders’ debt for equity, alleviating some of the pressure from billions of dollars in obligations.
CIT’s board is scheduled to discuss the proposal at a meeting Sunday evening.
The plan was formed after days of round-the-clock negotiations between CIT, its financial and legal advisers and a group of large bondholders over recent days. Jeffrey Peek, CIT’s chief executive and the architect of the 101-year-old company’s aggressive yet ill-timed push into subprime mortgages and student loans, was actively involved in the financing talks, according to people briefed on the matter.
It is unclear whether the long-sought-after lifeline will be enough to give CIT room to make crucial changes to its business at a time when it is unable to get financing from the capital markets.
The scope and breadth of the fallout of a CIT collapse also remain unclear. Hundreds of thousands of businesses across the country depend on the firm to provide financing for their businesses.
CIT has relied on money that it borrows in the capital markets to make loans to its customers. Once the credit markets froze over, the company was in peril.
It is also uncertain how much — if any — of the $2.33 billion in taxpayer money that CIT received late last year will be recouped.
If the plan does not succeed, CIT, with $75 billion in assets, could be the biggest failure of a financial institution since the collapse of Lehman Brothers last fall. Since then, federal regulators have been pumping billions of dollars into numerous banks across the country to prop them up and create some stability in the nation’s financial system.
Last December, when the markets were in turmoil, the Bush administration rushed through CIT’s application to become a bank holding company and gave it $2.33 billion through the Troubled Asset Relief Program.
This time, however, when CIT asked regulators for another round of financial help, it found itself the flashpoint in a wide-ranging debate in Washington and on Wall Street over whether CIT had, in fact, a viable business model. Some officials contended that it did not represent enough risk to the broad financial system to warrant relief especially as the markets appear to now be on firmer footing.
A third front of the debate was whether, after throwing large sums of money to some of the nation’s largest banks, the Obama administration was doing enough to brace up institutions that lend money to smaller businesses. Many of those same banks, including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America, reported either record or substantially improved results last week.
In the end, the government opted not to provide CIT access to a program through the Federal Deposit Insurance Corporation that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.
But Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, according to a government official briefed on the situation.
When that door closed last week, CIT executives still held out hope that they would receive approval from regulators to transfer some assets to a Utah-based bank that CIT controls that has about $3 billion in deposits.