THE BOARD of CIT yesterday approved a two-year, $3 billion (€2 billion) rescue package with a group of lenders that enables the troubled US finance group to avoid a bankruptcy filing, after round-the-clock weekend talks.
One party to the financing said: “This paves the way for an orderly restructuring of the balance sheet with time and capital, and it will give CIT’s customers plenty of capital.” The company, which provides finance to almost one million small and medium-sized companies in the US, and its creditors had to move quickly to arrest a slide into bankruptcy and prevent its best customers from defecting for fear the lender could no longer support them.
CIT employs 450 people at its European services centre in Blackrock, Co Dublin.
The rescue finance will not come cheaply. The yield on the paper is expected to be about 11 per cent, generous enough to give potential lenders an incentive to provide capital out of court.
Many creditors, led by banks such as JP Morgan Chase, had hoped to provide financing in the context of a bankruptcy filing, which would give them a first call on all CIT’s assets. But such debtor-in-possession financing might not have offered such a lucrative yield.
Providers of the capital comprise traditional money managers and hedge funds, which bought into the debt at much less than 100 cents on the dollar. They include Baupost, a Boston-based hedge fund, CapRe, hedge fund and private equity firms Centerbridge Partners, Oaktree Capital, Pimco and Silverpoint Partners.
Barclays will act as agent on the financing package.
The agreement gives CIT enough time to work out which, if any, assets it should sell. The next step is likely to involve cajoling other holders to exchange their debt for equity and then, having demonstrated CIT has a viable survival plan, to go to the US government and ask for help.
CIT yesterday confirmed that Jeff Peek, its chief executive, would stay on after the financing.
Mr Peek and his team had been criticised for diversifying into high-risk businesses such as subprime lending and student loans and relying on capital markets to fund its balance sheet.
CIT’s creditors stepped in after it was clear the government was unwilling to provide emergency assistance in guaranteeing CIT’s debt, accepting assets in exchange for cash from the US Federal Reserve or allowing CIT to transfer more assets into the bank holding company set up in December.
The rescue financing will come as a relief to the government: had CIT filed for bankruptcy protection, the US Treasury would probably have lost the $2.3 billion of bailout funds CIT received last year. It would also have been a huge embarrassment for the Fed, which had described CIT as adequately capitalised when it approved its banking application. – (Copyright The Financial Times Limited 2009)
