Denied federal bailout, CIT taps $3B private rescue; may be strategy for other troubled banks
By Daniel Wagner and Stevenson Jacobs, AP Business Writers
Tuesday July 21, 2009, 12:44 am EDT
WASHINGTON (AP) — With bondholders coming to the rescue of troubled commercial lender CIT Group Inc. (CIT), and not the government, a new reality is setting in for investors.
With federal bailouts drying up and the economy still in distress, many more financial firms could face bankruptcy. When they do, it will be major private lenders that will have to decide whether to rescue the companies or allow them to fail.
It signals a return to the traditional path for financially troubled firms after nearly a year of government aid.
“It wasn’t clear that Treasury wanted this to be a turning point, but that’s the way it’s worked out,” said Simon Johnson, a former chief economist with the International Monetary Fund, now a professor at the Massachusetts Institute of Technology’s Sloan School of Management.
Johnson said the markets took so kindly to CIT’s quest for private-sector cash that the government “would feel pretty comfortable about” threatening bankruptcy for firms with less than $100 billion in assets.
Bondholders’ $3 billion rescue of CIT marks the first time since the banking crisis erupted that private investors have stepped in to save a big financial firm without federal help or oversight.
The lifeline for CIT, whose clients include Dunkin’ Donuts franchises and clothing maker Eddie Bauer, aims to sustain the company long enough for it to rework its heavy debt load, which includes $7.4 billion due in the first quarter of next year. It does not guarantee CIT will avoid bankruptcy.
CIT said late Monday that the rescue includes a $3 billion secured term loan with a 2.5-year maturity, which will ensure that its small and midsized business customers continue to have access to credit. Term loan proceeds of $2 billion are committed and available immediately, with an additional $1 billion expected to be committed and available within 10 days.
The short-term financing comes at a high price — an interest rate of about 10.5 percent, said a person close to the negotiations who was not authorized to discuss the matter publicly.