The Malaysian Insider

UPDATED

NEW YORK, July 21 — CIT Group Inc secured a US$3 billion (RM10.6 billion)  loan facility from its bondholders yesterday and said it plans a comprehensive restructuring of its liabilities, but gave few details.

With the emergency loan, the 101-year-old lender to small and mid-sized businesses warded off a threat of imminent bankruptcy, but many experts questioned its ability to survive in its current form.

Several analysts and bankers said earlier in the day that the rescue financing might only delay a bankruptcy filing, in light of skittishness among CIT customers and the New York-based company’s inability to readily tap capital markets.

But the scarcity of the details made public by CIT shows that much remains to be worked out as bondholders and the company seek an “orderly process” to split off CIT’s profitable operations from its money-losing businesses, said one expert.

What’s more, the high interest rates CIT will have to pay bondholders jeopardize the lender’s odds for survival, said Michael Goldsmith, a managing director at financial advisory firm BBK.

“CIT will be hard pressed to be profitable when it lends to its clients — they’re losing money on every loan — not a very good sign,” Goldsmith said.

The loan gives the CIT more time to restructure its debt, and preserves the ability of thousands of businesses to obtain cash needed for day-to-day operations.

The company, which lends to nearly one million small and mid-sized businesses, said as a first step in its recapitalisation plan, it has started a cash tender offer for its outstanding floating rate senior notes due Aug. 17.

The offer will be for US$825 for each US$1,000 principal amount of notes tendered on or before July 31.

CIT said it and a bondholder committee would work on the “balance of the recapitalisation plan, which is expected to include a comprehensive series of exchange offers designed to further enhance CIT’s liquidity and capital.”

The company cancelled its plan to report second-quarter results on July 23, saying it would now do so when it files its quarterly report on Form 10-Q.

CIT’s shares, which closed up 78.6 per cent at US$1.25 on the New York Stock Exchange, were up another 9 cents, or 7.2 per cent, to US$1.34 in after hours trading.

LOAN TERMS

The US$3 billion secured term loan has a 2.5-year maturity. The term loan proceeds of US$2 billion are committed and available now, with an additional US$1 billion expected to be committed and available within 10 days.

CIT would pay interest of 10 percentage points above the three-month London Interbank Offered Rate, a source familiar with the matter said. This equates to an annual rate of about 10.5 per cent.

This financing would be backed by unsecured CIT assets, which probably exceed US$10 billion, another source previously said.

The rescue from a group of its major bondholders, which sources have earlier said includes Pacific Investment Management Co, was approved by CIT’s board after negotiations over the weekend.

An official announcement of the rescue had been expected as early as Monday morning but was delayed by regulatory issues, a person familiar with the matter said.

RETAILER HOPES

Restructuring experts said CIT has some valuable businesses that could be acquired or survive as part of a scaled-down CIT, including its factoring business.

Factors buy receivables, or the right to receive money owed, from suppliers at a discount so that those suppliers can continue to have working capital. CIT gets paid back when retailers sell goods, typically within 90 days.

Retail industry groups last week urged US Treasury Secretary Timothy Geithner to act to ensure CIT’s survival.

CIT had sought emergency federal funding, but talks with the government broke down last week. The Obama administration appeared to draw a line as to how readily it would bail out troubled companies, following several big corporate bailouts over the last year.

The bondholder rescue could preserve the government’s US$2.33 billion investment in CIT from the Troubled Asset Relief Programme. CIT became eligible for such financing when it became a bank holding company in December.

A rescue “comes as a great relief” for retailers preparing for the back-to-school and holiday shopping seasons, said Tracy Mullin, chief executive of the National Retail Federation.

“CIT could not be allowed to fail at a time when retailers are already struggling to survive,” she said in a statement.

CEO SURPRISED

Problems at CIT mushroomed two years ago in the wake of Chief Executive Jeffrey Peek’s decision earlier in the decade to expand into subprime mortgages and student loans.

Last week’s government decision not to provide aid surprised Peek, who then led the company’s efforts to seek help from private investors, one of the people familiar with the matter said.

CIT has about US$40 billion of long-term debt, CreditSights said. It has lost close to US$3.3 billion since the end of 2007.

A bankruptcy would have made CIT, with US$75.7 billion of reported assets, the largest US financial company to go bankrupt since Lehman Brothers Holdings Inc last September.

The cost of insuring CIT debt against default declined with news of the rescue. On Monday, it cost US$4.3 million upfront plus US$500,000 annually to insure US$10 million of CIT debt for five years, down from US$4.45 million upfront on Friday, according to Phoenix Partners Group.

CIT debt maturing in three to five years yielded in the mid-20s to mid-30s per cent, according to bond pricing service Trace.

Evercore Partners and Morgan Stanley are CIT’s financial advisors, while Skadden, Arps, Slate, Meagher & Flom LLP and Wachtell, Lipton, Rosen & Katz are legal counsel for the financing and restructuring plan. Barclays Capital is arranger and administrative agent for the term loan financing. Latham & Watkins is legal counsel to Barclays. — Reuters