Bondholders to Bail Out CIT

By Bob Blandeburgo
Associate Editor
Money Morning

CIT Group Inc. (NYSE: CIT) appears to have struck a $3 billion financing deal with bondholders late Sunday night, rescuing it from the brink of bankruptcy after last week failing to obtain additional bailout money from the U.S. government.

CIT will be charged a high interest rate in the deal, and won't have its long-term financing needs permanently fixed, The Wall Street Journal reported, citing people involved in the transaction. The financing could act like a "bridge" to a series of debt-exchange offers that the company would launch in order to get bondholders to swap some of their bonds for equity in the company for new debt that matures later.

Under the terms of the proposal, CIT would likely pay interest rates 10% above the London Interbank Offered Rate (LIBOR), according to The Journal's sources. CIT would also agree to use some of its best loans as collateral.

Six of CIT's largest bondholders, including Pacific Investment Management Company LLC, Oaktree Capital Management L.P., Silver Point Capital and Centerbridge Partners have agreed to the proposal. Other bondholders named in the deal are Capital Research & Management and Baupost Group.
There are concerns about the rapid speed of the deal, which was crafted in less than 48 hours.

"They didn't get to do the due diligence you'd normally get to do," said an unnamed source in an interview with The Journal.

And some analysts believe the deal will only slow an inevitable bankruptcy.

"Even if they put together a deal today and postpone a bankruptcy filing, CIT may be back in the same place in the not-too-distant future because unemployment rates, business-loan delinquencies and corporate default rates are climbing," Martin Weiss, president of investment consulting firm Weiss Research told The Journal.

The deal means vendors as well as small- to mid-sized retailers can breathe a sigh of relief after worrying that the supply chain would be disrupted this holiday season by a CIT bankruptcy. With the additional funding, CIT will be able to restructure itself and minimize bondholder losses that would have been worse had the lender filed for bankruptcy and sold its assets at bargain prices.

Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) rely on CIT for factoring, an old form of finance in which the lender pays the vendor for its accounts receivable. If the retailer fails to pay for the goods, the lender assumes the responsibility to pay the vendor.

"A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation's economy. That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession," NRF President and Chief Executive Officer Tracy Mullin said in a statement aimed at persuading the U.S. government to rescue CIT.

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