CIT far from out of the woods

July 20, 2009

It looks like CIT has once again narrowly escaped falling over the edge after a group of bondholders agreed to extend $3 billion to the troubled lender in exchange for high-quality collateral and juicy interest rates. The thing is CIT still needs to sort out its failed business model based on borrowing in credit markets to provide financing to small and medium-sized businesses. But as we’ve seen again and again in this credit crisis, relying overwhelmingly on markets can sink even well established banks – think Northern Rock.

CIT’s alternatives, however, are few. Its deposit base is small, and as David Hendler notes via Bloomberg, building up it up isn’t easy or cheap.

“We still think it is a losing effort in the intermediate term although some bondholders may end up better than others with this structure,” said David Hendler, an analyst at CreditSights Inc. in New York. “The wholesale model is dead and creating a branch deposit system from scratch is too expensive for CIT and takes too long to build to help any time soon.”

For the bondholders, it looks like it’s a risk worth taking since the bridge financing at least gives them a claim on what the Wall Street Journal calls CIT’s “highest quality collateral” and an interest payment of 10 percentage points over Libor.

More from the Journal:

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.

On Sunday afternoon, six of CIT’s largest bondholders, including Pacific Investment Management Co., Oaktree Capital, Silver Point Capital and Centerbridge Partners, agreed to the proposal, which would see investors providing $3 billion in funds and committing to other steps to help strengthen CIT’s financial position. Other bondholders, including Capital Research & Management and Baupost Group, are also part of the proposal.

Each bondholder would take up a portion of the loan, which isn’t evenly divided among the six-fund group. Each one is on the hook for hundreds of millions of dollars each, said a person involved in the talks.

Early readings are the financial markets are cheered by the bondholder rescue, but expect more bumps along this road as CIT attempts to transform itself into a viable lender.

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