If people are scared of terrorism, financial chaos or global warming, they will be willing to cede their national sovereignty, freedom and liberties for global authority. - CFR Member and Former Secretary of State Richard N. Gardner, April 1974
CIT Group Inc. on Tuesday said its chief financial officer is retiring, and noted that it is closer to filling out its new board.
The commercial lender, which emerged from bankruptcy protection on Dec. 10, said CFO Joseph Leone will retire April 30. A replacement has not yet been named.
Mr. Leone, 56, has been with the company for 25 years. He took over as finance chief in 1995 after serving as executive vice president of one of CIT's units.
CIT will also need to name a new chief executive soon, as Chairman and CEO Jeffrey Peek is due to retire at the end of the year.
CIT also named four new members to its board, moving closer to the goal identified in a regulatory filing Friday of having a new 13-member board.
The new board members are: Michael Embler, 45, formerly chief investment officer of Franklin Mutual Advisers; Arthur Newman, 66, a senior managing director of Blackstone Group LP; Daniel Ninivaggi, 45, of counsel to the law firm of Winston & Strawn LLP; and R. Brad Oates, 56, chairman and managing partner of Stone Advisors LP.
These additions bring the board to 11 directors, plus Mr. Peek. The new board will include the new CEO, five members from the old board and seven independent directors nominated by CIT's debtholders.The new board will select a successor to Mr. Peek, who in mid-October announced his retirement.
CIT, one of the nation's largest lenders to small and mid-sized businesses, was forced into bankruptcy after failing to raise cash to pay off outstanding debt. CIT was also hammered by mounting loan losses as more customers fell behind on repaying loans during the recession. It moved through bankruptcy in just six weeks because its key bondholders had already approved a plan to reorganize the company.
Shares of CIT added 31 cents to $28.54 in morning trading.
Billionaire investor Carl Icahn, who battled with CIT Group Inc.’s management before agreeing to support a prepackaged bankruptcy, reported holding a stake equal to almost 6.1 percent of shares outstanding.
Icahn, who said he was CIT’s largest bondholder before its bankruptcy, reported a stake of 12.1 million shares in a Securities and Exchange Commission filing today. New York-based CIT exited bankruptcy this month and its new stock began trading Dec. 10, less than two months after filing to reorganize.
Bankruptcy helped the company trim more than $10 billion in debt and extend bond maturities for three years. Icahn had made a competing offer, then supported CIT’s prepackaged bankruptcy after the lender agreed to corporate-governance changes. CIT collapsed amid losses tied to subprime lending and was unable to gain funding from the commercial-paper market.
CIT shares rose 73 cents, or 2.7 percent, to $28.23 today in New York Stock Exchange composite trading. CIT spokesman Curt Ritter wasn’t immediately able to confirm if Icahn was the largest shareholder.
CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy with financing from investor Carl Icahn after the credit crunch dried up its funding and a U.S. bailout and debt exchange offer failed.
New York-based CIT listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in U.S. Bankruptcy Court for the Southern District of New York. None of its operating subsidiaries, including CIT Bank, a Utah-based bank, were included in the filing, and operations will proceed as normal, CIT said in a statement.
The bankruptcy “will allow CIT to continue to provide funding to our small business and middle-market customers,” said Chief Executive Officer Jeffrey Peek in a statement.
CIT has $1 billion from Icahn to fund operations while it reorganizes. The credit line, to be drawn on until Dec. 31, will be a so-called debtor-in-possession loan.
The company had asked bondholders to exchange $30 billion in debt for new securities and equity. Icahn made a competing offer. After CIT’s offer expired at midnight on Oct. 29, the company said it was tallying 150,000 ballots.
The company’s debt holders had rejected the exchange offer, with 90 percent of holders who voted opting for the prepackaged bankruptcy plan. The plan will cut $10 billion in debt, and CIT seeks “quick confirmation” of its plan, CIT Group said in a statement.
CIT said it would try to emerge from bankruptcy two months from the date of its filing.
The case is In re CIT Group Inc., 09-16565; U.S. Bankruptcy Court, Southern District of New York (Manhattan.)
* CIT pays $285 million in fees to Goldman * Counting votes on restructuring plan, debt exchange * Shares fall almost 12 percent to 84 cents in pre-market
Reuters - Goldman Sachs Group plans to trim the rescue loan it arranged for CIT Group Inc by $875 million to $2.125 billion, CIT said on Friday.
CIT, which has been struggling to finance itself amid the credit crunch and recession, said it is effectively removing the part of the loan it hadn't taken, according to a filing with regulators.
The commercial lender paid $285 million as a fee to Goldman for reducing the loan and it has posted an initial $250 million in collateral, according to the filing. In return, Goldman has agreed it will not terminate the loan should CIT file for bankruptcy.
Goldman had been seeking to amend the loan since earlier this month, according to reports. The bank had been due a payment of $1 billion if CIT filed for bankruptcy, a source told Reuters.
CIT is likely to file for bankruptcy in the coming days, analysts have said.
If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding... "I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be. I think it would be a very, very drastic mistake in this country to allow CIT to go under." - Lynn Tilton, chief executive of distressed investment firm Patriarch Partners, CIT Collapse Would Be a Mess, Turnaround Experts Say, October 1, 2009
The lender has offered investors two options: an exchange of bonds for new securities and equity, avoiding a bankruptcy filing; approval of a reorganization plan before the company files for bankruptcy.
Separately, in a statement on Friday, CIT said an independent balloting company is counting more than 150,000 ballots from investors on the exchange and restructuring plan, which expired on Thursday.
The company did not say how long this process might take.
CIT shares fell almost 12 percent to 84 cents in pre-market trading.
Commercial lender CIT Group Inc. said Friday that billionaire investor and bondholder Carl Icahn agreed to support the company's restructuring plan amid reports CIT may soon file for bankruptcy protection.
Icahn also agreed to provide CIT with a $1 billion line of credit.
Icahn has been an outspoken critic in recent weeks of New York-based CIT Group's plan to restructure its debt in an effort to avoid collapse. CIT, one of the largest lenders to small and midsize businesses, has been trying to reduce its near-term debt burden by $5.7 billion.
"Our ability to secure an incremental $1 billion committed line of credit from Mr. Icahn's affiliates supports our restructuring plan and helps ensure our ability to continue to serve our existing small business and middle market customers," CIT spokesman Curt Ritter said.
On Wednesday, CIT received a $4.5 billion line of credit from lenders and other bondholders who had already provided it with $3 billion in financing over the summer.
Thursday marked the last day most CIT debtholders could agree to exchange their bonds for new debt that matures later and stock. Results of that exchange have not yet been released.
The company said earlier Friday it was still tabulating the votes.
Even if bondholders approve the debt restructuring plan, the company could still file for bankruptcy protection. At the same time they were asked to agree to swap their debt, bondholders were also asked to approve a prepackaged bankruptcy plan.
The Wall Street Journal, citing unidentified people, said the exchange offer likely failed and the company would file for bankruptcy protection as soon as Sunday night.
Ritter declined to comment on the likelihood of a bankruptcy filing.
A prepackaged bankruptcy, which would have the support of major bondholders, would speed up the process of restructuring CIT's debt and allow it to return to normal operations faster than a traditional bankruptcy filing.
CIT said Icahn's $1 billion loan would be available even if it files for bankruptcy.
Icahn had railed against the company's plan over the past week, calling it unfair to small bondholders. Earlier in the week, he offered to buy CIT's debt for 60 cents on the dollar from debtholders who agreed to reject the exchange and prepackaged bankruptcy offer.
Icahn said in a statement Friday afternoon that because he changed his stance on the offer, he will buy CIT's debt from bondholders regardless of their vote.
The agreement between Icahn and CIT came after the company agreed to make some changes to its offer, Icahn said. One of his biggest complaints about the plan was it would keep the board intact. On Wednesday, CIT said it would accelerate changes to its board of directors if it files for bankruptcy.
A failure by CIT could hurt an economy already struggling to recover, especially the retail sector. The company is a short-term financier to 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation.
CIT has been struggling as its costs to borrow money have eclipsed the income it generates from lending money. CIT lost its primary source of funding last year when the commercial paper market nearly collapsed at the peak of the credit crisis and has yet to recover.
Shares of CIT dropped 23 cents, or 24.2 percent, to close at 72 cents in Friday trading.
CIT Group has met at least one of the hurdles necessary to file for a prepackaged bankruptcy, sources said, bringing the commercial lender one step closer to the fast bankruptcy process it is seeking to lower its liabilities and get back to health.
Holders of about 90 percent of its unsecured bonds have approved the prepackaged bankruptcy, two sources familiar with the matter said late Friday. The company needed two-thirds approval.
But the company is still counting ballots to see if half of the voting bondholders have approved the deal, a necessary condition, according to a person familiar with the matter.
The 101-year old company is widely expected to clear that hurdle, and could file for bankruptcy as soon as this weekend.
CIT had been working hard to win bondholder support for its plan to restructure, and earlier Friday announced key agreements with creditors, including support from Carl Icahn, who had previously been the main opponent to the company's plans.
CIT also announced an agreement with Goldman Sachs Group that would reduce a $3 billion credit line to $2.125 billion but, critically, keep the line open during a bankruptcy.
"It looks like everything is pointing to a prepack," said Adam Steer, an analyst at CreditSights in New York. "Their best option is to turn off the lights and work their balance sheet down. It's pretty clear at this point."
The prepackaged bankruptcy plan involves giving bondholders new debt worth 70 pct of the face value of their old debt, plus giving them an ownership stake in the company equal to about 92.5 percent of the common stock.
Current preferred shareholders, including the government's $2.33 billion paid to CIT under the Troubled Asset Relief Program, will be converted into 5 percent of the company's common stock. Current common shareholders will get 2.5 percent of the new company.
CIT warned last week that if investors did not support its restructuring efforts, it could end up filing for bankruptcy without a plan for how to fix itself. Exiting bankruptcy could take a long time and destroy much of the company, CIT's management said in a presentation.
"We're all glad this is behind us and that we can now consummate this transaction and hopefully make bondholders some more money," said Jeff Werbalowsky, chief executive of Houlihan Lokey, the adviser to CIT bondholders.
"The company did the right thing in putting this behind us, and that's where this needs to be for a quick and successful restructuring."
CIT had sought to get support from bondholders to exchange their old debt for new securities, or to agree to a pre-packaged bankruptcy. The votes were due by the end of Thursday, October 29.
The debt exchange was widely seen as doomed to fail, given the number of competing interests involved.
CIT was once the largest lender to small and medium sized business in the United States. It said in a presentation earlier this month that it hopes to move key operations, such as vendor financing and small business lending, into its bank unit. That bank unit can then fund lending through deposit borrowing.
CIT Group Inc warned bond holders that if they failed to exchange their debt or approve a prepackaged bankruptcy, the commercial finance company -- and its debt investors' returns -- could suffer mightily.
The company said that, without a debt exchange or an orderly bankruptcy, the company would have to liquidate, an expensive process that could leave unsecured bondholders with somewhere between 6 cents and 37 cents on the dollar. These bonds were trading just above 60 cents on the dollar earlier on Friday.
"Let's be clear. A free-fall bankruptcy will ... result in a lower recovery for today's unsecured bondholder," CIT Chairman and Chief Executive Jeffrey Peek said in a pre- recorded webcast presentation.
CIT's restructuring plans were almost immediately slammed by billionaire investor Carl Icahn, who snapped up CIT debt in the past few months to become what he says is the company's largest bondholder.
New York-based CIT is trying to restructure its debt through getting debt holders to exchange their debt, or to agree to a pre-packaged bankruptcy. It is also looking to boost a $3 billion secured credit facility by another $4.5 billion.
Once the company restructures its liabilities, it can try to move some of its businesses into its regulated bank subsidiary and fund them with deposits instead of bonds.
Icahn said a better plan is to try to move businesses into the bank within nine months. If that does not happen, the company should wind itself down and pay out proceeds to debt holders. Icahn said that, if the company pays off its debt with money from maturing assets, his bonds could be worth 80 cents to 85 cents on the dollar.
"CIT would have you believe that a bankruptcy would be calamitous. We do not believe this to be the case," said Icahn, who made much of his fortune over the years buying controlling stakes in distressed companies.
Icahn has been increasingly active in companies in bankruptcy court this year. This summer, he was approved by a court to provide part of the bankruptcy financing for auto parts maker Lear Corp, a company he had once had a large equity position in and tried to acquire. He also received approval from a bankruptcy court to buy Tropicana Casino and Resort in Atlantic City.
Time is running out for CIT. The company has until Oct. 29 to restructure its debt or get approval for a prepackaged bankruptcy. In the beginning of November, about $1 billion of its debt matures...
CIT makes loans mostly to small and medium sized businesses and also has a large factoring business that services the retail sector.
Goldman Sachs will earn a $1 billion payout if commercial lender CIT Group goes into bankruptcy, according to media reports.The payment would be due under the terms ...
Goldman Sachs will earn a $1 billion payout if commercial lender CIT Group goes into bankruptcy, according to media reports.
The payment would be due under the terms of the $3 billion rescue deal it agreed with CIT in 2008.
CIT saw the value of its stock plummet to less than $2 per share on last week’s New York Stock Exchange.
Last year, it was cut off from its traditional source of funding, the commercial paper market, forcing it into the credit facility deal with Goldman Sachs.
The US government also bought more than $2 billion of CIT shares as part of the Troubled Asset Relief Program in December 2008.
But in July the company failed to secure a second US bailout after asking for a further $3 billion in rescue financing.
CIT chief executive officer Jeffrey Peek has asked bondholders to swap unsecured obligations for new secured debt and preferred shares, in an attempt to stave off bankruptcy.
Goldman Sachs Group Inc said on Monday that it is in talks to amend the terms of a $3 billion loan to CIT Group Inc, the Wall Street Journal reported.
The investment bank is expected to receive about $1 billion if commercial lender CIT were to file for bankruptcy, the Wall Street Journal said.This is a point of contention as the company battles to raise additional funds as part of its broader restructuring plan, the Journal said.
CIT is studying several options for the loan from Goldman Sachs, one of which is trimming the $1 billion payment, the Journal said, citing a person familiar with the situation.
"Goldman Sachs is working with CIT and its creditors to enable it to continue to use the facility, which we believe gives it an attractive cost of funding, particularly relative to the other financing that has been provided to CIT at less attractive levels," Goldman Sachs said in a press release on its website.
Goldman spokesman Michael DuVally declined to comment further.
CIT spokesman Curt Ritter declined to comment on the report.
Goldman extended $3 billion in funding to CIT in June 2008, according to regulatory filings.The 20-year contract, which was set as the credit markets froze, calls for CIT to pay Goldman 2.85 percent of the maximum amount lent. That translates to about $85.5 million a year for the first 10 years of the agreement, the Journal said, and CIT would be required to pay $1 billion if it were to file for Chapter 11 bankruptcy.
Citing a Goldman Sachs internal memo, the Wall Street Journal the financing for CIT required the bank to "establish long-term funding" of its own, which it is obligated to pay even if the CIT facility is paid off early or CIT files for bankruptcy. The $1 billion payment is "designed to cover Goldman Sachs in such an event," according to the memo.
CIT, a century-old company that is one of the largest lenders to thousands of small and medium-size businesses, pays roughly 10 percent interest on its latest loan. Goldman's loan, made before CIT acknowledged massive financial problems, charges about 3 percent interest, the Journal said.
Georgia small businesses brace for the potential loss of a major funding lifeline.
Business to Business July 24, 2009
The teetering fortunes of troubled commercial lender CIT Group are setting off increasingly urgent alarms for Georgia retailers, and even an 11th hour deal to at least temporarily forestall bankruptcy is bringing scant reassurance for stores and their suppliers waiting for another shoe to drop on their bruised industry.
"I think if CIT goes 'bye-bye,' there are going to be tons of independent (retailers) going 'bye-bye' and several manufacturers going 'bye-bye' too," warns Jeffrey Gardner, owner of Cornerstone Furniture in Atlanta. "CIT is a big part of this business."
"My guess is there are 10,000 to 20,000 retailers in Georgia who would be affected by this," agrees John Heavener, president of the Georgia Retail Association. "And it's not just retail. When sales started to drop, state revenue dropped precipitously. The states and counties now are having budget crunches. Almost 19 percent of workers in Georgia work in retail. It's a link effect to all other parts of the economy."
Strapped by shrinking access to capital, the 101-year old CIT Group called for help last year and received a $2.3 billion federal infusion. But in mid-July, its second appeal for aid was turned down in a move seen as a sign the Obama administration has reached its limits for corporate bailouts. That brought speculation that the company would file for bankruptcy protection in a matter of days.
Appeals from the retail industry have declared the company too important to fail. "I think it would be very, very damaging," Heavener cautions.On July 20, CIT announced it has reached a $3 billion agreement with its bondholders to keep the company afloat, and CEO Jeffrey Peek promised "a restructuring plan that will better position our company for the long term." But observers say the company's long-term outlook is far from hopeful, with CIT needs a daunting $7 billion just to address debts coming due over the next year. "It's a stopgap," grants Heavener. "Everything is stopgap now."
Who is CIT?
Long a source of funding for small and midsized businesses, CIT today stands out most significantly for its role as a financial intermediary between retailers and suppliers in a practice known as "factoring" or "factor financing." When placing an order, retailers often lack the cash to pay for merchandise up front, but manufacturers and vendors need that money for costs such as raw materials, rent, utilities or employees salaries. As a "factor," CIT provides short-term financing to bridge that gap by buying the accounts receivable from the supplier and subsequently taking payment from the retailer.
"A lot of times, they won't even ship you. They won't ship you unless you factor through something like CIT," explains Jimmy Huff, vice president of Atlanta-based Huff Furniture, who factors with CIT for five of his manufacturers.
It's a highly specialized niche, one in which the National Retail Federation says CIT is almost unique, especially now that the other major name in the field, GMAC, has moved away from factoring in the midst its own government bailout. The American Apparel & Footwear association estimates that CIT does 60 percent of the factoring for the U.S. apparel and footwear industries. "CIT is really the one big player," says J. Craig Shearman, vice president of governmental affairs with the National Retail Federation. "There are a bunch of small players, but it's doubtful even whether all of them together are big enough to pick up the slack."
With a 56-year history, Huff believes his company has plenty of credit to weather a possible demise of CIT, but he worries about smaller, entrepreneurial companies with little cash on hand and limited credit, especially in today's lean lending environment. "It probably will affect some of the newer businesses, the startups. They aren't well known. They are needing to get that credit so they can keep doing business."
Domino effect
"It would be just disastrous, another bad thing to happen to the economy" says Diane, not her real name, whose family business in Atlanta factors through CIT Group. "I just think people are not aware of how big, how important they are to the small-business economy."
Diane asked that neither she, nor her company be identified, demonstrating a concern that Shearman says has become common. "Most of the retailers we have spoken to have actually asked us not to use their names because they don't want anything associated with a particular company. They don't want people to think 'oh, there's going to be a shortage of sweaters at such and such a place this year.'"
But shortage is exactly what some industry representatives are predicting if CIT is suddenly removed from the equation, creating a hole in Georgia's supply chain just in time for the industry's critical Christmas shopping season. If already strained retailers must suddenly come up with their own cash, or search the current tight credit markets for alternate sources of credit to buy inventory, Heavener says they will likely simply buy less inventory. "Certainly people would have thinner shelves than normal for the holidays, probably less stock and probably increased prices because of that. We're going to see some retailers not even be open for the holidays – not only not have inventory, but not even be open."
"It's like prepaying for your house," explains Sean Ergle, owner of Area Urban Interiors in Atlanta, who has become all too familiar with the perils of retailing without factoring support. He was cut off by CIT in a payment dispute a year ago and has had to come up with other ways to pay his vendors since. "Retailers cannot survive delivering a prepaid product unless they have tons of capital. We started our business with a couple of thousand dollars and charged up the credit cards, but the debt ... it's a vicious cycle."
It makes it difficult sometimes to explain time lines," Ergle points out. "Normally we can sell something and have it in four to six weeks. So I have to explain to the customer why it's not here. When the customer pays a thousand dollars for something, they want it when they want it."
It's a scenario Camille Sheppard is eager to avoid. Owner of Atlanta apparel supplier Camille and Company, she estimates that fully half of her business is factored through CIT group and she's trying to make contingency plans. "We're going to talk to our banks, talk to our credit cards, see if we can get extensions. We're going to talk to our vendors and see if we can work with them directly."
Georgia retail advocates say they're holding on to cautious hope that, given the newest arrangement with its bondholders, CIT can shore up its finances enough to keep the merchandise flowing, especially as businesses try to strike deals for the holiday season. Says Heavener: "I think that we have a reprieve that may give us some breathing space. I think a long-term solution has yet to be found."
"It's definitely not over," echoes Shearman, who sees the deal buying time for the government to reconsider stepping in. The next critical point for CIT is a tender offer in which it plans to buy back $1 billion of its debt for 82.5 cents on the dollar by August 17. If enough bondholders agree, a major deadline will be defused. If not, the company could be flirting with bankruptcy again in a matter of weeks, and reports on Friday have emerged about breaking up the company to avoid bankruptcy.
"Nothing has been decided yet," says Sheppard. "I don't know if I'm going to have a problem going forward for the fall or not. Right now we're in limbo."
Devising backup plans as CIT Group teetered on the brink of bankruptcy made for aggravating times last week, says Urban Outfitters chief financial officer John Kyees.
So it was a relief yesterday when the New York financial institution - a critical player in retailing, whose loans in the "factoring" market are important for merchandise deliveries - apparently averted bankruptcy with emergency funding.
Now, even if CIT's finances unravel down the road, Philadelphia-based Urban Outfitters has protected itself.
"We're well-prepared," Kyees said, "because we're identifying all the vendors that are factored by CIT and working with our merchants."
Hustle was the order of business among retail executives alarmed by the news that CIT's financial distress might lead to a Chapter 11 bankruptcy declaration. Officials at Urban Outfitters and Boscov's Department Store L.L.C., based in Reading, worked the phones to ensure that even if CIT were to go under they would continue receiving merchandise.
"We're sending letters to all of them asking, if something were to happen to CIT, what is their plan," said Albert Boscov, the retail chain's chief executive.
At Urban Outfitters, "we called our folks at Wachovia, who are now Wells [Fargo], and said, 'How would you feel about factoring if CIT fell apart on some of our vendors?' and they said, 'No question,' " said Kyees, whose company is cash-rich despite the economic malaise. "Our balance sheet is pristine."
Beyond its role as a commercial lender, CIT Group is the nation's largest issuer of short-term loans in the factoring market.
When smaller and midsized manufacturers and vendors are ready to ship an order to a retail chain, they turn to a so-called factor to pay them in full for the shipment.
That gives retailers up to three months to review the order before paying for the goods. Manufacturers, meanwhile, get the cash and can move forward.
The factor charges interest, and, like a bank, also takes full responsibility for collecting payment from the retailer. If a retailer goes bankrupt or can't pay for what it received, the factor gets stiffed - not the vendor.
Because of that, the factor also evaluates a retailer's creditworthiness before agreeing to front money for a shipment - something that helps keep midsize vendors from getting bruised.
"The small manufacturer, they don't have a big credit department," said Boscov. "They don't have analysis. So to them, getting someone who says the day you ship, 'We're going to give you the money, and you don't take the risk,' is a tremendous asset to small manufacturers."
If CIT were to disappear from a field it now dominates, thousands of vendors and manufacturers would be left scrambling to find another short-term lender such as a bank - an intense task in a tight credit market.
Cash-strapped vendors also could demand full payment at time of delivery - a tactic more often employed when a beleaguered retail company is no longer deemed worthy of credit.
"Very few retailers will pay up front, to make sure they get the goods and the goods are in the right quantity and so forth," Boscov said. "So it's a real problem." His stores buy from 350 vendors and manufacturers who use CIT as a factor.
Urban orders merchandise from 140 vendors that use CIT as a factor, mostly for goods shipped to its 266 Anthropologie and Urban Outfitters stores, Kyees said.
Neither retailer has reported delivery problems so far.
In the case of Boscov's, CIT also is one of four lenders holding a slice of a $200 million loan that financed the chain's emergence from bankruptcy last year. Boscov said the other lenders would cover CIT's loan obligations if necessary.
Were CIT to fail, it could potentially disrupt back-to-school and holiday shipments from vendors such as "the $50 million-a-year T-shirt company rather than one of these big companies like Jones [Apparel] or Liz Claiborne," said Wharton retailing expert Stephen J. Hoch.
But with word of CIT's temporary reprieve, through a $3 billion deal with major bondholders, such fears have receded a bit.
"Better that it get sorted out now," Hoch said, "than . . . crunch time."
The private funding of CIT Group this week highlights once more how small- and medium-sized businesses, the backbone of the day-to-day American economy, are getting short shrift from the federal bailout and economic recovery programs.
CIT Group, Inc. is one of the nation’s prominent lenders, supporting more than 1 million small- and medium-size businesses, including some 2,000 vendors providing some 300,000 retail stores with merchandise. During the financial meltdown CIT continued to provide loans and financing to keep American small businesses running when the major banks hoarded their emergency bailout funds, and severely curtailed or ceased providing loans and financing to small businesses altogether. Now, faced with possible bankruptcy, CIT is about to secure a rescue loan from its existing bondholders.
Isn’t this how these things have been going all along?
The big super-corporations get bail-out loans, but local community small businesses can’t get bank lines-of-credit or short-term bridge loans to stay in business.
The big mortgage lenders get a helping hand as a reward for their bad decisions, but at the same time small businesses are closing, and their now-unemployed workers and owners lose their homes through mortgage foreclosure.
The CEOs and financial wizards who precipitated the crisis are squabbling over salary and bonus packages larger than some communities’ entire annual budgets, yet unemployment is at its highest rate in a century.
Some of the huge manufacturing industries, which employ less that 20% of American workers, get the big bailouts; meanwhile local, smaller companies, employing the vast majority of us, who provide us all with our daily product and service needs, have to resort to bootstrap financing to stay in business.
And now this. One of the few financial institutions that has continued to support American small- and medium-sized businesses is having to bootstrap-like finance itself, having been denied similar emergency financial assistance by the federal government. And there is no guarantee that the loan from current bondholders will be enough. As lack of financial support programs forces more local businesses to fail, the liquidity squeeze tightens on CIT. If CIT fails, then more local companies will be forced out of business. A bad downward spiral. In her What if CIT Group fails? WashingtonTimes.com post, Candice Choi looks at the implications. Other analysts fear a CIT failure will have a disastrous, major ripple effect throughout the entire retail economy.
If the economic recovery is going to happen anytime soon, the government, the top-level financial institutions, the investors and the holders of the wealth of this country are going to have to stop giving our small businesses short shrift.
You may not have heard of CIT Group Inc., but there's a good chance you've shopped in stores that it helps keep in business.
The New York-based bank is one of the nation's largest lenders to small and midsized businesses. Despite the scope of its customer base, however, CIT emerged from meetings with federal regulators Wednesday failing to secure the cash infusion it needs to avoid bankruptcy.
In turning CIT away, the Obama administration is betting that any ripple effect from the company's demise wouldn't pose a critical risk to economic recovery.
CIT is now rushing to raise billions of dollars in financing from debt holders. As the company fights for survival, here are some questions and answers about how small businesses and the broader economy are affected by CIT.
Q: First of all, what is CITGroup?
A: It's a century-old company that primarily provides lending to small and midsized businesses. To a much lesser extent, it also provides advisory services and leases out property such as airplanes and rail cars.
The company has been bought and sold a number of times over the years. Most recently, it was acquired in 2001 by Tyco International Ltd., which at the time was embroiled in an accounting scandal. To pay down debt, Tyco spun off CIT Group in an initial public offering in July 2002. CIT has been an independent public company since then.
Q: Who does CIT serve?
A: CIT says it serves more than 1 million business customers, most of them small or midsize businesses.
The company's clients run the gamut, but tend to be in industries considered riskier in the small business landscape, such as restaurants and retail. Dunkin' Donuts franchisees and Dillard's Inc. are among the company's clients.
The bank is also the nation's biggest lender for entrepreneurs and minority-owned businesses.
It's not clear what percentage of the country's small business lending market CIT Group holds, but the company is the ninth-largest commercial and industrial lender in the United States, according to Foresight Analytics.
As of March 31, CIT Group held 1.7 percent of the $1.4 trillion in commercial and industrial loans on bank balance sheets. (Those include loans to businesses of any size.)
Q: What role do small businesses play in the broader economy?
A: Small businesses provide about half of all private-sector jobs. According to the U.S. Small Business Administration (SBA), small firms generated 60 percent to 80 percent of net new jobs every year over the past decade.
Small businesses - defined as having fewer than 500 workers - made up 99.9 percent of the 27.2 million businesses in the country in 2007, according to the SBA. Just 17,000 were large businesses.
The odds aren't great for small firms, however. The SBA says that while two-thirds of new businesses survive at least two years, only 31 percent survive at least seven years.
...If CIT fails, it would be the first major financial institution that the government allowed to fail since the collapse of Lehman Brothers late last year. The company is a key lender to more than one million businesses, with major clients like Dunkin Donuts and N.J.-based communications company Avaya.
Small and mid-sized companies also make up a large part of CIT’s clientele, as do retailers and retail manufacturers. There has been much speculation as to how the failure of CIT Group will impact small businesses, and on Thursday, the National Retail Federation sent a letter to Treasury Secretary Timothy Geithner and Federal Deposit Insurance Corp. Chairwoman Sheila Bair, defending the lender’s importance to the retail sector. The letter requested that the Administration aid the struggling lender, with the NRF President and CEO calling CIT “too important to the retail industry to be allowed to fail.”
“A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation’s economy,” said NRF President and CEO Tracy Mullin. “That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”
Mullin said the failure of CIT could lead to a disappearance of crucial short-term financing resulting in a shortage of merchandise for many retailers this holiday season.
Meanwhile, ratings agencies continue to downgrade the company’s debt. On Thursday, Standard & Poors downgraded CIT Group to CC from CCC+, while Fitch downgraded the company to a ‘C’ from a ‘BB-’, saying it was highly likely that the company would file bankruptcy in the “very near term”. DBRS downgraded the company’s rating to ‘CCC’ from ‘BB’.
If Bondholder Deal Doesn't Go Through, Major Lender CIT Could File One of Largest Bankruptcies in History
ABC News Sept. 30, 2009
Remember CIT? The major lender to small and medium-sized businesses that came back from the brink of bankruptcy in July? Now, CIT Group Inc. is back on the brink.
CIT Group Inc. shares plunged in premarket trading Wednesday, Sept. 30, 2009, as the commercial lender is reportedly trying to craft an exchange that would cut its debt and offer bondholders an equity stake in the company in a bid to avoid bankruptcy.
The company is furiously trying to work out a deal with bondholders that would wipe out around 30 to 40 percent of its more than $30 billion in debt, a source in the financial industry told ABC News, confirming a story in today's Wall Street Journal. If the bondholder deal falls through, the company will likely have to file for bankruptcy.
At this point, the source told ABC News, the century-old company is "hanging by their fingernails."
CIT had no comment.
The last-ditch effort to avoid bankruptcy is the latest chapter in a saga that has gone on for months. CIT accounts for around 60 to 70 percent of financing for small and medium-sized businesses such as Dillard's department stores and Dunkin' Donuts. But the company ran into problems after diving into subprime mortgage lending and student lending. In late July, CIT secured a $3 billion agreement with bondholders to stave off bankruptcy.
The bondholder agreement came days after the government said it would give no additonal bailout money to the company, after providing $2.3 billion in Troubled Asset Relief Program funds in December. Before the bondholder agreement was reached, CIT had asked the Federal Deposit Insurance Corp. to allow it to issue debt backed by the government, enabling the company to bring in cash and continue lending. But the FDIC balked, so CIT turned to the Treasury Department and the Federal Reserve. But the effort ended in vain.
On July 15, the Treasury said, "Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."
The government's decision was a testament to the improvements in the financial system in the past year. If CIT had failed last fall or last winter, its collapse could have been catastrophic. But, this year, even though a CIT bankruptcy could be one of the biggest Chapter 11 filings in the country's history, the government was no longer compelled to help.
(GuruFocus, October 19, 2009) Invest Guru Carl Icahn offers $6 billion to the troubled company CIT Group Inc. to replace the company’s tender offer to bond holders. He said the offer can save the company $144 million. The shareholder right advocator thinks the company’s own plan favor the larger bond holders and disadvantages the small guys.
CIT Group stock is trading high today. With a bankruptcy looming, the stock could be worthless, but Icahn’s message injected a dose of confidence in the company and investor is bidding the stock more than 20% higher.
Gurus Sold Out CIT
David Williams owns 3,000,000 shares as of June 30, 2009, a decrease of 40% of from the previous quarter. In the quarter ended on September 30, 2009, Williams sold out his position.
Earlier on, as the story unfolding, Martin Whitman sold out his holdings in the quarter that ended on 07/31/2009. HOTCHKIS & WILEY sold out his holdings in the quarter that ended on 06/30/2009. Dodge & Cox sold out his holdings in the quarter that ended on 06/30/2009. Richard Perry sold out his holdings in the quarter that ended on 06/30/2009.
Gurus Still Holding CIT
As of June 30, 2009, these were still Investment Gurus who held the stock:
1 Guru Increased Positions in CIT: David Dreman owns 55,445 shares , an increase of 78.02% from the previous quarter. This position accounts for less than 0.01% of the $3.12 billion portfolio of Dreman Value Management.
2 Gurus Kept Positions in CIT Unchanged or Slightly Adjusted: Charles Brandes owns 23,919,838 shares , which accounts for 0.28% of the $18.33 billion portfolio of Brandes Investment. Edward Lampert owns 15,406,937 shares , which accounts for 0.34% of the $9.71 billion portfolio of ESL Investments.
They may or may not have sold their positions since then, we will know for sure when they report their holdings later on this quarter.
Disclosure forms, according to Bloomberg, reveal that Treasury Secretary Timothy Geithner’s closest aides received millions of dollars from Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms.
The henchmen include Gene Sperling, who last year took in $887,727 from Goldman Sachs and $158,000 for speeches mostly to financial companies, including the firm run by accused Ponzi scheme mastermind R. Allen Stanford. Another top aide, Lee Sachs, reported more than $3 million in salary and partnership income from Mariner Investment Group, a New York hedge fund, reports Bloomberg.
In addition to working for Goldman Sachs, Sperling is on the staff of the Council on Foreign Relations, where he serves as Senior Fellow for Economic Policy and Director of the Center on Universal Education. He is also an economic adviser for Hillary Clinton.
Sperling worked in the Clinton administration as the President’s National Economic Adviser and Director of the National Economic Council. He was tutored by bankster master criminals Larry Summers and Robert Rubin. Clinton called him “the MVP” of his Wall Street economic team.
Lee Sachs is described as Geithner’s “right-hand man handling the financial crisis.” He was on the board of directors of Bear Stearns. In 1998, he joined the Clinton administration in Rubin’s Treasury as deputy assistant secretary for government financial policy. Less than a year after getting the post, Lawrence Summers replaced Rubin as secretary and Sachs got a promotion to assistant secretary for financial markets.
“As part of Geithner’s kitchen cabinet, Sperling and Sachs wield influence behind the scenes at the Treasury Department, where they help oversee the $700 billion banking rescue and craft executive pay rules and the revamp of financial regulations,” Bloomberg continues. “Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.”
Goldman Sachs is at the very epicenter of the international bankster cartel on Wall Street along with Brown Brothers, Harriman, Lehman Brothers, Kuhn Loeb, Inc. J.P. Morgan, Chase and a handful of others. It is one of around a dozen or so global institutions that are allowed to purchase Bills, Bonds and Notes directly from the Treasury. It is among the top five investment banks in the world.
Goldman Sachs received billions of dollars – to be paid off by future generations of Americans – for its highly speculative credit default swaps. It was the largest single recipient of tax payer money in AIG bailout. The government had forked over $180 billion to AIG as of April of this year. The New York State Attorney General Andrew Cuomo announced in March that he was investigating whether AIG’s trading counterparties improperly received government money.
The presence of Gene Sperling and Lee Sachs in the Treasury is to say the least a conflict of interest. But then Timothy Geithner is a former chairman of the Federal Reserve Bank in New York and his predecessor, Hank Paulson, was the head of Goldman Sachs.
Goldman Sachs, the Federal Reserve, and the Treasury are basically one in the same. In July, former Reagan Treasury official Paul Craig Roberts asked: “Does the US Secretary of the Treasury work for the people or does he work for the banking system on Wall Street?” to which he replied, “He works for Goldman Sachs.”
“This bankster firm controls the economic policy of the United States,” Roberts said elsewhere.
Matt Taibbi, in his article in Rolling Stone, described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Goldman Sachs the vampire squid is not finished with the American people. It will soon profit from the emerging cap and trade scam cooked up by the globalists and banksters. Dianne Feinstein and Olympia Snow have introduced a bill to make the Commodity Futures Trading Commission (CFTC) the sole regulator of the carbon market created by cap-and-trade legislation.
The current chairman of the CFTC is Gary Gensler, formerly of Goldman Sachs. Gensler had worked diligently with master criminal Alan Greenspan to protect credit default swaps from regulation. He also worked hard to deregulate electronic energy trading, allowing Enron to rip-off billions.
The mega-bankster crime syndicate is a part owner of the exchanges where carbon allowances would be traded. It has spent millions of dollars lobbying for cap-and-trade legislation in anticipation of making billions of dollars at the expense taxpayers and consumers.
The CFTC and the cap and trade scam will be the next derivatives bubble.
Goldman Sachs and its operatives in the Obama administration, the Treasury, and the Federal Reserve will be there to profit obscenely.
You’re here to pay them tribute on the road to the New Serfdom.
An investor is trying to put together a group of bondholders to potentially press for a bigger stake in CIT as the struggling commercial finance company works to restructure its debt.
The investor, Little Bear Investments, owns subordinated CIT notes, or debt that would fare worse than regular unsecured corporate bonds if the company were to file for bankruptcy.
Little Bear believes that subordinated bond holders are taking too big a hit from CIT's proposed debt restructuring, Zach Prensky, managing director, said on a conference call on Tuesday.
A CIT spokesman declined to comment.
CIT last week said it would allow unsecured debt holders to exchange their securities for new secured debt and equity. But subordinated debt holders can only exchange their notes for equity.
Subordinated debt holders are a relatively small group in terms of CIT's overall balance sheet: the company has about $2 billion of debt in this class, compared to about $30 billion of unsecured corporate bonds.
But traders said the subordinated debt holders could also slow down the exchange or any bankruptcy process, creating a nuisance for larger investors.
Prensky said he is hoping to put together a group of investors to potentially demand twice as much equity as part of the exchange, or even more than that. Alternatively, the group could press for a promise from the company to pay extra money to the current subordinated debt holders if CIT's assets end up performing well enough. This sort of contingent liability would not appear on the company's balance sheet.
CIT is hoping to reduce its indebtedness by $5.7 billion as it struggles to repair its balance sheet and generate the cash flow required to repay maturing liabilities. But up to $1.9 billion of that reduction could come from giving equity to current owners of CIT subordinated notes.
Goldman Sachs Group Inc. (GS) said Monday it is in talks to potentially amend the terms of a $3 billion loan to embattled CIT Group Inc. (CIT).
The investment bank is on tap to receive about $1 billion if troubled commercial lender CIT were to file for bankruptcy. This is a point of contention as the company battles to raise additional funds as part of its broader restructuring plan.
CIT is looking at a number of different options for the loan from Goldman Sachs, one of which is trimming the $1 billion payment, according to one person familiar with the situation.
The investment bank extended $3 billion in funding to CIT in June 2008, according to regulatory filings. The 20-year contract, which was put in place as the credit markets froze, calls for CIT to pay Goldman 2.85% of the maximum amount lent, which would come to about $85.5 million annually for the first 10 years of the agreement. CIT would be required to pay $1 billion if it were to file for Chapter 11 bankruptcy.
According to a Goldman Sachs internal memo, the financing for CIT required the bank to "establish long-term funding" of its own, which it is obligated to pay even if the CIT facility is paid off early or CIT files for bankruptcy. The $1 billion payment is "designed to cover Goldman Sachs in such an event," according to the memo.
"Goldman Sachs is working with CIT and its creditors to enable it to continue to use the facility, which we believe gives it its most attractive cost of funding," Goldman spokesman Michael Duvally said.
Jeffrey Peek, CIT's chief executive, is attempting to persuade bondholders with about $31 billion in debt to swap that for new secured debt worth at least $5.7 billion less and to extend debt maturities. If enough creditors sign on, this reduction in debt load will help CIT avoid bankruptcy court, for now. The company warned in July it may be forced to file for a pre-packaged bankruptcy after it failed to get additional financial aid from the government.
The company secured a $3 billion rescue loan from a group of its largest bondholders, including Pacific Investment Management Co., Oaktree Capital, Silver Point Capital, and Centerbridge Partners, at the end of July.
CIT is in talks with these bondholders, along with some banks, to provide additional funds that could be used as debtor-in-possession financing to fund CIT's operations if it is forced to file for bankruptcy protection, people familiar with the situation said last week. Alternatively, if the exchange offer succeeds, the money would make sure the company has enough cash to operate and could also refinance some secured debt, these people said.
CIT hasn't yet finalized the new loan, but banks are expected to be chosen over the next few days to arrange the loan, according to a person familiar with the situation.
CIT, a century-old company that is one of the largest lenders to thousands of small and medium-size businesses, pays roughly 10% interest on its latest loan. Goldman's loan, made before CIT acknowledged massive financial problems, charges about 3% interest.
Duvally said the $1 billion payment the investment bank would receive in the event of a CIT bankruptcy "would not be a windfall payment." Instead, it would reflect the "present value of the spread to be earned over the life of the facility," Duvally said.
If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.
"I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be," Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.
"I think it would be a very, very drastic mistake in this country to allow CIT to go under," Tilton said.
CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.
Shares of CIT fell 40 percent on Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. But if those options do not work, there is unlikely to be any company able to fill CIT's shoes, the experts said.
"Over 80 percent of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies," Patriarch's Tilton said.
"Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure."
And while CIT's need to restructure has been telegraphed for months, retailers and other small businesses, which are particularly reliant on their funding, appear to have done little to prepare for a collapse, said Cory Lipoff, an executive vice president at Hilco Merchant Resources who works with distressed retailers.
"Everybody has adopted a wait-and-see attitude," Lipoff said. "Everybody is uncertain and cautious, but nobody is taking any actions right now," Lipoff said at the summit.
Part of the issue for retailers and other businesses that rely on CIT for loans, is that it remains unclear how a bankruptcy would affect their contracts, turnaround experts said. If CIT goes through a pre-packaged bankruptcy, or ends up with deals to sell some units, their loan contracts might not change at all. If its bond exchange is successful, there may also be no change.
"My partner went out and talked to retail lenders (about CIT)... and the message that came back is 'We're just going to wait and see how this all plays out over the next 60 days,'" Lipoff said.
Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.
But the lurking possibility of a free-fall bankruptcy could actually be useful to CIT in gaining support for its plans at this stage, another turnaround expert said.
"Clearly CIT is negotiating in the shadow of bankruptcy," said Corinne Ball, the attorney at Jones Day who led Chrysler through its bankruptcy earlier this year. Ball said the threat of bankruptcy can push the company's stakeholders to more "productive discussion" about what course to pursue and force bondholders to think about what they would get if the company were to fail.
Just as the financial services industry seems to have made it past the worst of the economic meltdown, one small lender now threatens to reverse that trend. CIT Group (CIT), a lender to small and medium sized businesses, appears to be on the brink of collapse for the second time this year.
CIT Group averted bankruptcy over the summer, when it secured a $3 billion loan with its bondholders, and managed to tweak a giant tender offer for debt maturing shortly thereafter. The move served as a mere stopgap however, since the lender had a $2.9 billion negative cashflow position at the end of June this year.
With the moment of truth at hand once again, insiders say that CIT is attempting to prioritize nearer-term debt holders, a move which would dilute common stock holders by around 95 percent, leaving them almost wiped out.
Wednesday, traders pushed up the cost of CIT’s credit default swaps by 4 percent, to 26 percent; the implication is that the lender has a 45 percent chance of defaulting on its debt within three months, and an 85 percent chance of defaulting on its debt by 2014.
Meanwhile, CIT is also rumored to be recommending that bondholders approve a pre-packaged bankruptcy plan in case the new debt-exchange doesn’t go through.
Whatever the outcome, it’s clear that CIT doesn’t have the financial muscle to protect all parties involved.
For equity holders, any further financing efforts are likely to leave them holding the bag, since they are at the bottom of the heap in terms of having any claims on the firm’s assets. Holders of debt maturing later than next year look likely to experience some sort of default.
Most worryingly of all, for small businesses there really aren’t many other places they can go to get the kind of financing that CIT provides them with right now:
“Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure,” said Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said on Tuesday at the Reuters Restructuring Summit.
Tilton wants the firm to use the potential consequences of its own bankruptcy as a way for government officials to sit up and listen, and potentially step in to save the day. In that case, the result would be an additional fresh bailout package, just as it was thought that many financial services firms were weaning off their own and starting to raise money in the capital markets.
That in turn will make many of the recent bank share offerings much less attractive, as stock prices of small banks decline on fears of further CIT-style fallouts.
Followers of financials will be watching CIT like a hawk over the coming days, and so they should be. It genuinely appears now that the lender threatens to put a spanner in the works of much of this year’s momentum among financial services firms.
CIT Group Inc is negotiating a new credit facility of up to $10 billion that could help the finance company pay off maturing debt and stave off bankruptcy, people familiar with the situation said.
The details of the facility are still being negotiated, and its size might be substantially smaller than $10 billion, two people familiar with the matter said. The company may forgo the loan altogether if it successfully renegotiates the terms of some of its existing credit lines, the sources said.
The existing credit lines include a $3 billion loan that CIT clinched from bondholders in July and a financing facility from Goldman Sachs.
CIT spokesman Curt Ritter declined to comment.
CIT shares rose 34 cents to $2.01 in afternoon trading, up 20.4 percent to their highest level since July. The company's bonds rallied too.
CIT is struggling to fund itself after losing access to the unsecured corporate bond market. The company has $3 billion of debt maturing in the fourth quarter, according to a quarterly filing in August. About half of that maturing debt is unsecured and must be refinanced or repaid from the company's dwindling cash holdings.
Regulators have put CIT Bank under a cease-and-desist order, preventing the unit from accepting new deposits. That bank was supposed to be a key source of funding for the company in the future.
The bank said in a quarterly filing that it hopes to restructure itself. If it is unsuccessful, it might have to file for bankruptcy, it said.
Analysts said CIT is struggling with real problems that may be difficult to solve even with additional loans in the near term.
"You can buy yourself a year of life, or maybe more, but then where are you? The world might get better and you might be able to borrow again in secured and unsecured bond markets, but there's no guarantee that it's going to play out that way," said Shawn Abboud, executive director of credit sales and trading at APS Financial Corp in Austin. Many of CIT's competitors are banks that have much cheaper funding costs.
SOME BULLISH
But some investors in CIT securities are much more bullish on the company's ability to avoid bankruptcy. One debtholder said the company could reduce its debt by exchanging current notes for new securities.
When it has more equity relative to its debt, regulators may lift the cease-and-desist order on its bank, allowing it to gather more deposits.CIT may also be able to sell assets, such as its railcar leasing business, and rely more on secured financing in the future, the debtholder said.
There may be interest in asset sales.Billionaire investor Wilbur Ross (former executive managing director of Rothschild Inc) told the Reuters Restructuring Summit on Tuesday that he would be interested in buying some CIT businesses. He also said he was interested in expanding his railcar leasing business, a unit that CIT has tried in the past to sell.
CIT shares have rallied in recent weeks, and the cost of protecting its debt against default has dropped, helped by rumors of a new credit. Under the terms of the $3 billion July loan, it must come up with a restructuring plan agreeable to lenders by October 1. That plan will likely include debt exchange offers, the company said in a regulatory filing in August.
Several investors who spoke to Reuters said they expect the company to offer new secured CIT debt to holders of short-dated debt, and to offer equity in the company to holders of longer-term debt. Investors may also get some combination of debt and equity, and perhaps even cash, to encourage them to exchange, debtholders said.
CIT's notes with a 4.25 percent coupon due in February 2010, the fifth most actively traded corporate bond in the U.S. market, rose on Tuesday to 76.5 cents on the dollar, from 74.5 cents on September 25, the last most significant trade, according to MarketAxess. That debt traded at 63.25 cents at the start of the month.
CIT Group Inc is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.
CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.
The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.
If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history.
A second source said that while some bondholders supported the plan, a majority was not yet on board.
CIT's board has yet to approve any course of action, the first source said.
CIT spokesman Curt Ritter declined to comment.
Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds.
U.S. taxpayers are likely to see much of their investment wiped out under a bankruptcy, but not under a successful exchange offer, the first source said, adding that U.S. regulators had been frequently briefed on the developments of the plan.
The lender to small and medium-sized businesses, as well as to commercial real estate borrowers, has until October 1 to present a restructuring plan to lenders.
With the toll of bank failures surging, regulators are expected Wednesday to ease rules they proposed only last month for private investors seeking to buy failed institutions.
Private equity funds have been targets of criticism in recent years for their risk-taking and outsized pay for managers. But the depth of the banking crisis appears to have softened the Federal Deposit Insurance Corp.'s resistance. In part, that's because fewer banks are now willing to buy other, ailing institutions.
In July, when bondholders rescued commercial lender CIT Group Inc., it marked the first time since the crisis erupted last fall that private investors had saved a big financial firm without federal aid or oversight.
Rising loan defaults, fed by tumbling home prices and worsening unemployment, have hammered banks. Eighty-one have failed so far this year. The closings have drained billions from the FDIC deposit insurance fund, which insures regular bank accounts up to $250,000 and is financed with fees paid by U.S. banks.
The FDIC estimates bank failures will cost the fund around $70 billion through 2013. The fund stood at $13 billion — its lowest level since 1993 — at the end of March. It's slipped to 0.27 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.
The FDIC seizes failed banks and seeks buyers for their branches, deposits and soured loans. Under the crush of failures, the agency says private equity can inject vitally needed capital into the system, especially with fewer healthy banks looking to acquire failed institutions.
"There's an enormous need for private money to do this," said Josh Lerner, a professor of finance at Harvard Business School. "There's the sense that you have a lot of money which is currently sitting on the sidelines."
A potential "sweet spot" for private equity buyers are banks with $5 billion to $20 billion in assets, said Chip MacDonald, an attorney at Jones Day in Atlanta. Falling within that range was BankUnited FSB, a Florida thrift with $12.8 billion in assets that closed in May. BankUnited was sold for $900 million to a group of private equity investors that included billionaire Wilbur Ross ' firm, without the new FDIC policy being in effect.
Private equity firms tend to buy distressed companies, slash costs and then resell them a few years later. They invest their own capital to buy a company and pump it up with money from other investors.
Such "leveraging" to buy companies amounts to, on average, three-to-one for private equity firms: They invest $3 in outside capital for each $1 they put up themselves. The roughly 2,000 private equity firms in the U.S. have around $450 billion in capital to invest, according to the Private Equity Council, the industry's 2-year-old advocacy group.
Investors in private equity funds include pension funds, university endowments and charitable foundations.
Organized labor still denounces private equity as vultures and job-killers. Unions got a sympathetic ear from many Democrats in Congress in 2007, when several key lawmakers pushed to raise taxes for managers of private equity firms as well as hedge funds. That tax campaign stalled.
The private equity industry is exploiting the economic crisis to enrich itself, said Stephen Lerner, director of the private equity project at the Service Employees International Union.
"They are trying to use their political and financial sway to get into what they see as bargain basement prices for very little risk."
But with the financial crisis and recession causing banks to fail at the fastest pace since the height of the savings-and-loan crisis in 1992, support is building among regulators to use private equity money to bolster the industry.
"We want nontraditional investors," FDIC Chairman Sheila Bair said in early July, when the agency proposed its rules. "There is a significant need for capital, and there is capital out there."
When the FDIC board meets in a public session Wednesday, it's expected to ease restrictions, people familiar with the issue say. They spoke on condition of anonymity because the rules haven't been made public in final form yet.
Regulators also have begun to reach overseas.
On Friday, the FDIC seized Guaranty Bank, a big Texas lender, and sold most of its operations to the U.S. division of Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank. Guaranty was the second-biggest U.S. bank to fail this year, with about $13 billion in assets. Its sale marked the first time during the crisis that a foreign bank had bought a failed U.S. institution.
In the FDIC policy as proposed, the most important requirement is for private equity investors to maintain enough cash in the banks they acquire, as measured by its capital leverage ratio. The ratio is a measure of health, reflecting a bank's capital divided by its assets.
Investors would have to maintain a ratio of at least 15 percent for three years. Most banks have ratios lower than that. Citigroup Inc., for example, had a reported ratio of around 9 percent as of June 30. The mandate could be reduced to 10 percent or lower in the final rules, the people familiar with the issue say.
A private equity role in the FDIC's resolution of failed banks would be in addition to private investors' participation in a Treasury program to buy banks' bad mortgage-backed assets. That program is intended to relieve banks of up to $40 billion of these assets, whose value plummeted with real estate prices.
But some analysts question whether this program will provide much benefit. Rising unemployment and loan defaults appear to have surpassed soured bank securities as threats to the financial sector.
The board of CIT Group Inc., one of the nation’s largest lenders to small and midsize businesses, approved a deal with major bondholders to keep the company out of bankruptcy, said two people briefed on the talks. CIT will receive a rescue loan from key bondholders hoping to keep it alive long enough to restructure its debt, these people said.
The emergency loan would provide temporary financing to CIT so it could launch a debt exchange offer to free itself from upcoming debt maturities. Under the deal, CIT’s main bondholders would give CIT $3 billion at an initial interest rate of about 10.5 percent, according to a New York Times report.
The deal will not necessarily prevent a bankruptcy filing for the ailing firm, but will give it desperately needed breathing room while it attempts to refinance existing debt. CIT has a $1 billion payment due in August.
The Times said the temporary funding would provide CIT time to launch an exchange of outstanding debt for equity. By swapping debt for an equity stake in the company, CIT would no longer have to pay back the debt, which is essentially a loan. Instead, investors would hold an ownership stake in the company.
CIT has been scrambling to raise $2 billion to $4 billion. The New York-based lender received $2.3 billion from the government’s Troubled Asset Relief Program last fall. That money could be lost if CIT files for bankruptcy protection. The lender faces $7.4 billion in debt due in the first quarter of next year.
CIT’s failure could pose a major threat to the economy, industry representatives have warned. A collapse of CIT could cut off financing just as businesses need it most during the ongoing recession.Its failure could force thousands of companies to cut costs or shut down — driving up unemployment and dashing hopes for an economic recovery.
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, so other lenders taking up all the slack would pose a big financial strain.
CIT Group Inc (CIT.N) is in talks with JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N) about short-term financing as it looks for ways to avoid bankruptcy, a source close to the company said on Friday, sending the lender's shares and bonds up.
Bankruptcy, however, is still possible over the next few days, and CIT, a 101-year-old lender that services nearly one million small- and mid-sized businesses, is continuing to talk with regulators about the situation, the source said.
Financing talks have turned primarily to arranging for a debtor-in-possession (DIP) loan for the lender in case of a bankruptcy, CNBC reported, adding that talks were also continuing for financing out of court.
JPMorgan and Morgan Stanley were in talks with other banks about a DIP loan, Bloomberg reported.
Meanwhile, CIT's bondholders were going to hold another conference call on Saturday, a source in the lender's bondholder group said.
"They haven't thrown the towel, and they still are trying to work very hard to get some sort of funding, but at the end of the day I still think that there is a very high risk of a bankruptcy event," said Sameer Gokhale, an analyst at KBW.
CIT is in search of $2 billion to $3 billion of financing, according to the source, who declined to be identified because the talks were private. The company also is in talks with bondholders about a debt for equity swap, the source said.
But the source in the bondholders' group said many bondholders were pursuing a "debt for new debt" exchange and that a debt for equity exchange was not a real consideration.
The first source added one potential scenario is a sale of some assets to raise capital. The lender had wanted regulators' permission to transfer assets to its bank unit, but that did not happen, the source said.
"It is just going to allow them to pass the next 30 to 60 days, but they have exhausted their balance sheet condition so fast that it was kind of breathtaking," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.
The company's shares moderated early gains and closed up 29 cents, or 71 percent, at 70 cents, after more than doubling their price amid hopes of financing. The company lost 75 percent of its market value on Thursday as government talks for financing collapsed and bankruptcy loomed.
Standard & Poor's said on Friday that it was removing CIT from its S&P 500 .SPX market index as of July 24 after the close of trade, replacing it with software maker Red Hat Inc (RHT.N).
CIT's credit default swaps rose to about 51 percent as an upfront cost on Friday afternoon, according to Markit Intraday data, up from about 44 percent on Friday morning and up from about 48 percent late on Thursday.
The price of CIT's floating-rate notes due in August rose to 71.5 cents on the dollar in busy trading, from about 61 cents late on Thursday, according to MarketAxess, helped by news about the negotiations with Goldman Sachs and JPMorgan, bond fund manager Sean Simko said.
The company sought additional help even after gaining the status of bank holding company in December so it could draw $2.33 billion of taxpayer money from the Treasury's Troubled Asset Relief Program.
But the Obama administration declined help, saying it had set high standards for granting aid to companies and leaving private investors as the one alternative to avoid collapse.
The impact of CIT's demise would likely pale by comparison with the collapse of investment bank Lehman Brothers Inc (LEHMQ.PK) last September, analysts said.
"If they can't survive, the market will resolve this for them and move on. I don't see massive systematic disruptions if CIT will not exist three months from now," Wirtz said.
Still, the ripples of a collapse could be widespread and worsen the effects of the economic downturn for some firms.
CIT has about $40 billion of long-term debt, according to independent research firm CreditSights. About $1.1 billion of debt will come due in August, followed by about $2.5 billion by year end.
The New York Post reported JPMorgan could acquire CIT's factoring unit, which finances more than $50 billion of wholesale inventory, at a time of the year when the collapse of the lender could disrupt retailers holidays plans.
CIT declined to comment and JPMorgan was not available for comment. But analysts cooled expectations of an asset sale.
"It has some valuable franchises, but if they sell the assets in a distressed situation, they don't even get the par value for the assets. They will have to take losses and those losses will further weaken the balance sheet, so that doesn't seem to be a viable strategy," Gokhale said.
The Obama administration has refused to provide government backing for outstanding debt or other emergency aid to CIT, a New York-based bank that finances nearly one million small and midsize companies in the U.S.
The collapse of CIT’s efforts to secure government relief on Wednesday has left the 101-year-old bank teetering on the edge of bankruptcy and threatens a cut-off of funding to retailers and suppliers. That could result in a wave of bankruptcies and closures, leading to tens of thousands of layoffs.
The administration’s decision to deny aid to CIT stands in sharp contrast to its policy of providing unlimited bailouts to major banks that cater to large corporations and big investors.
It is of a piece with its decision to drive General Motors and Chrysler into bankruptcy in order to impose tens of thousands of layoffs and slash the wages and benefits of auto workers, its opposition to bailing out auto dealerships slated for closure, and its rejection of any federal aid to California or other states facing fiscal insolvency.
CIT is the 26th largest bank in the United States. Its bankruptcy would represent the fourth largest bank failure, by assets, in U.S. history. As of Friday, the bank was seeking to stave off filing for Chapter 11 bankruptcy protection, a development that could rapidly lead to its liquidation.
It was reportedly in talks Friday with Goldman Sachs, JPMorgan Chase, and Morgan Stanley (a spinoff of JPMorgan) on securing credit either to avert a bankruptcy filing, or secure sufficient financing to survive in bankruptcy court.
The New York Post reported thatJPMorgan, the biggest U.S. bank, by assets, was interested in acquiring CIT’s factoring unit, the bank’s biggest and most lucrative business.
As the country’s largest factor, CIT buys the receivables of thousands of manufacturers and suppliers, mainly to retail businesses. For a fee, it pays its clients cash up front so they do not have to wait 30 to 90 days for retailers to pay for their supplies and inventory. It also guarantees suppliers that they will be paid even if retailers whom they supply go bankrupt.
CIT controls 60 percent of the U.S. market for factors.It is a factor for some 2,000 manufacturers and suppliers whose goods are sold at 300,000 retailers across the country.
Both suppliers and retailers fear that a CIT bankruptcy will disrupt the flow of cash and credit, disrupting supply chains and leaving businesses unable to pay their bills.
Gail Dudack, chief investment strategist at Dudack Research Group, told clients:
“The company’s collapse would certainly ripple through thousands of small and medium business that rely on CIT for trade financing and lending. This raises the risk of more bankruptcies and more unemployment and would be a significant negative for an already fragile economy.”
Roy Calcagne, CEO of Craftsmaster Furniture, said CIT’s crisis could disrupt the entire supply chain of the furniture industry.
“There could be a huge ripple effect that I’m not sure the government is fully aware of,” he said, “especially if you look at all the ways this impacts supply chains. It could be devastating for our industry.”
Jerry Reisman, a bankruptcy attorney at the law firm Reisman, Peirez and Reisman, told Reuters that he was “deluged” with desperate calls from apparel companies concerned about losing access to credit.
“The government’s decision will,” he said, “result in many companies being unable to make payroll on Friday and inability to pay suppliers. Many of these companies and their suppliers will be forced to file bankruptcy themselves, causing a further decline in the economy.”
CIT, which has an $80 billion balance sheet, has had eight straight quarters of losses, totaling $3 billion. Beginning in 2004, when its current CEO, Jeffrey Peek, took control, the bank plunged into subprime mortgages and student loans. The impact of the subprime collapse and resulting credit crunch has had a particularly crippling effect on CIT, which does not take deposits but rather relies on short-term commercial credit to finance its long-term debt.
For the past two years it has been cut off from wholesale credit markets. Last December, it obtained permission from the government to register as a bank holding company in order to receive $2.3 billion in cash under the Troubled Asset Relief Program (TARP).
CIT has $1.1 billion in debt coming due in August followed by $2.5 billion due by year’s end. The Federal Reserve Board reportedly carried out a “stress test” on the bank earlier this week and concluded it needed at least $4 billion in capital to stay afloat.
Its speculation-driven problems are not essentially different from those of giant banks and financial firms such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and American International Group, which have received tens of billions in taxpayer handouts and are deemed by the Obama administration “too big to fail.”
An administration spokesman said the decision to deny CIT emergency support demonstrated that Obama has “a very high standard” as to which firms can receive government assistance.More to the point, it demonstrates the degree to which the administration’s economic policies are dictated by the biggest Wall Street players.
Since the financial crisis erupted last year, the government has engineered the disappearance of Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual, immensely increasing the economic power of the strongest mega-banks, particularlyGoldman Sachs and JPMorgan Chase.
There are a host of smaller regional banks that are sliding toward bankruptcy, further increasing the dominance of the biggest Wall Street firms. At a Senate Banking Committee hearing on Thursday, Senator Jim Bunning, Republican from Kentucky, said Federal Deposit Insurance Corporation Chairman Sheila Bair had told him another 500 banks could fail “unless something dramatic happens.”
The decision to deny aid to CIT came amidst spectacular second-quarter earnings reports byGoldman Sachs and JPMorgan Chase. Goldman reported record earnings of $3.44 billion and JPMorgan reported a sharp rise in profits to $2.7 billion for the quarter. Both banks reaped the vast bulk of their profits from their investment banking and trading divisions.
They are benefiting from the demise of competitors and the ongoing troubles at Bank of America and Citigroup, which gives them greater access to fees generated by underwriting stocks and bonds, while they take advantage of market volatility to place their own bets on stock and bond price fluctuations. Neither these, nor other major banks, are using the lifeline provided by government cash and other subsidies to significantly increase lending to businesses or consumers.
They continue to hide an estimated $2 trillion in toxic assets on their balance sheets, refusing to sell the nearly worthless assets at market prices or write down their value.JPMorgan, even as it reported higher profits, noted large losses in consumer loans and commercial real estate. Citigroup and Bank of America, in their earnings reports released on Friday, similarly reported growing losses in these sectors.These assets will continue to deteriorate as the impact of mass unemployment leads to more defaults on consumer loans and prime mortgages, and the recession further depresses commercial real estate values.
Goldman set aside nearly half of its quarterly revenues of $13.8 billion for salaries and bonuses, setting the stage for record compensation packages for executives and senior employees. This is in line with a general resumption by the banks of seven-and-eight-digit windfalls for top executives.
White House Chief of Staff Rahm Emanuel implicitly alluded to the bumper earnings reports byGoldman and JPMorganin justifying the decision to cut off CIT. “Given the sense of calm,” he said, “it is a symbol of a different phase” in the government’s rescue of the banking system.
Similarly, Obama’s top economic adviser Lawrence Summers in a speech in Washington DC declared that the U.S. financial system was “back from the abyss,” and Treasury Secretary Timothy Geithner said the financial markets were sending “important signs of recovery.”
The behind-the-scene negotiations surrounding CIT Group’s threatened bankruptcy filing is bringing to mind the 2001 collapse of Finova, another sizeable mid-market lender.
On the eve of Finova’s bankruptcy filing in March 2001, Warren Buffett seemingly came to the rescue with a $6 billion loan package to help keep the financial firm running in bankruptcy and payoff creditors. The financial package, which Buffett put together with Leucadia National Corporation, came from a new company called Berkadia.
The offer from Buffett set-off an usual bidding war for the right to provide rescue money to the bankupt company. Rival bids soon emerged from GE Capital and Goldman Sachs.
Ultimately, the Buffett and Leucadia partnership prevailed. Finova, which did a lot of factoring for mid-sized companies like CIT, emerged from bankruptcy and the loan was paid off several years ago.
Finova shareholders, of course, lost out in the bankruptcy. But the firm’s creditors were treated rather well and the firm was able to continue running some of its lending business.
Right now, Reuters and others are reporting that Goldman Sachs and JPMorgan Chase are talking about providing some short-term financing of up to $3 billion to CIT. But CNBC is also reporting that the banks may be talking about providing CIT with bankruptcy financing to continue operating.
If I had to place a bet, it’s looking like a Finova all over again.
