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CIT Group's rescue by bondholders hailed as turning point

NEW YORK — It's a new twist in the financial crisis: A major bank on the verge of a last-minute rescue gets a bailout, but not from the government.

Commercial lender CIT Group Inc. confirmed late Monday that it has secured a $3 billion bailout from its bondholders, the first time since the banking crisis erupted that private investors are stepping in to save a big financial firm without federal help or oversight.

CIT said the rescue includes a $3 billion secured term loan with a 2.5-year maturity, which will ensure that its small and midsized business customers continue to have access to credit. Term loan proceeds of $2 billion are committed and available immediately, with an additional $1 billion expected to be committed and available within 10 days.

The lender also is moving to immediately restructure its debt to provide additional liquidity and further strengthen its capital position.

"With today's announcement, our board of directors, management team, advisers and a steering committee of bondholders, who are lenders under the term loan financing, are now actively focused on a restructuring plan that will better position our company for the long term," said Jeffrey M. Peek, CIT's chairman and chief executive, in a statement.

The deal and robust earnings reports last week by several big banks raise hopes that private capital can start flowing again into the beaten-down banking industry, analysts said. That was all but unthinkable just a few months ago.

Scott Talbott, the top lobbyist with the Financial Services Roundtable, which represents CIT and other big financial firms, said the government's seeming pullback from the banking sector was a welcome sign.

"When the government steps in, you disrupt the market," he said. "That was necessary to restore liquidity but distorted the free-market system. Now the exit strategy is becoming clear."

CIT lends money to nearly a million small and midsized U.S. companies. It was forced to turn to bondholders for help after the government refused to save the company last week, a sign the administration is pulling back on costly and unpopular bank rescues.

The lifeline for CIT, whose clients include Dunkin' Donuts franchises and clothingmaker Eddie Bauer, aims to sustain the company long enough for it to restructure its debt. It does not guarantee CIT will avoid bankruptcy. The company has a $1 billion payment due in August.

Had CIT been allowed to collapse, some experts feared it would have dealt a crippling blow to an economy still bleeding hundreds of thousands of jobs a month despite a nearly $800 billion federal stimulus program.

The retail sector would have been hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing.

"If CIT had gone under, that would have left a huge hole in the supply chain," said Craig Shearman, a spokesman for the National Retail Federation, one of the trade groups that had urged the government to prevent CIT's collapse.

By not getting involved, the administration gambled CIT was not so enmeshed with the financial system as companies like Citigroup, Bank of America and others banks that accepted federal bailout money, analysts said.

CIT Group's rescue by bondholders hailed as turning point 07/20/09 [Last modified: Monday, July 20, 2009 9:01pm]
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