CIT Gets Some Breathing Room

Courtesy of Tom Lindmark at But Then What

Hallelujah, a victory of sorts for capitalism.

The WSJ is reporting that CIT has reached an agreement with some of its bondholders that will give it some breathing room:

CIT Group Inc. was close to securing $3 billion in last-minute rescue financing from its bondholders Sunday in a deal that should keep the struggling firm — once the largest issuer of small-business loans in the U.S. — out of bankruptcy court, people familiar with the matter say.

The deal, which was being considered by CIT’s board Sunday night, charges CIT very high interest rates, and it doesn’t permanently fix the company’s long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders’ losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.

If the deal is completed, it could help reduce CIT’s debt load, strengthen its capital position and alleviate pressure on CIT to pay down $1 billion in debt that comes due in August. It may also preserve the U.S. Treasury’s $2.33 billion investment made as part of the Troubled Asset Relief Program.

The development appeared to vindicate U.S. regulators, who balked at appeals to help CIT. And it suggested that, unlike in recent months, private capital is available to plaster over cracks in the financial system.

The deal carries a heavily punitive interest rate of 10 percent over LIBOR (the relevant LIBOR index isn’t specified but the Journal references 3-month LIBOR) and requires CIT to pledge high quality assets.

It appears to be a stop-gap measure to buy time to allow the company to either arrange some debt for equity swaps or to swap some near-term debt maturities for more extended maturities. Sadly, there still appears to be some intention to secure government financial assistance.

The article notes that CIT still has a rough road ahead and I couldn’t agree more. Regardless of how much it shores up its balance sheet the core problem is asset quality. The longer the recession keeps the economy down the more severely are CIT’s customers financial conditions going to be strained. Their asset quality is suspect now and given management’s penchant for growing the company during the good times, there is likely to be further deterioration.

There are limits to the extent that financial engineering can paper over fundamental problems.

Having said all of that, let everyone take notice that it’s not necessary for the government to save everything. It’s high time that message made the rounds. The sooner it does the more likely are we to see private sector solutions to these sorts of problems.