Fisher Investments Editorial Staff
Media Hype/Myths, US Economy

CIT’s Private Reprieve

By, 07/21/2009

Story Highlights:

  • Despite being denied much-needed Fed financing last week, CIT managed to escape bankruptcy court for now with a $3 billion deal with its bondholders.
  • The loan could prove to be more band-aid than permanent solution depending on CIT's ability to drastically restructure and reduce debt.
  • But the bondholder bailout is an encouraging sign that solving Financials' problems is being shifted from the public to the private sector.

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Financials are still making big news as worries persist over "next shoe to drop" scenarios. But the latest shoe-drop candidate, CIT Group Inc., isn't proving to be a slipper-slipping Cinderella. Despite being denied much-needed Fed financing last week, CIT managed to escape bankruptcy court for now with a $3 billion deal with its bondholders.

CIT, a 101-year old firm with almost $76 billion in assets, is one of the largest lenders to small and midsize businesses in the US. The firm scrambled for capital last week or face bankruptcy—but federal regulators were unwilling to back CIT's debt. However, CIT bondholders are said to have committed $2 billion in loans on Monday with the plan to raise another $1 billion over the next 10 days to keep the firm out of bankruptcy court.

Of course, CIT bondholders aren't lending dough for wholly altruistic reasons—the deal could minimize the losses bondholders would otherwise sustain in bankruptcy court and offers a potentially high return on the investment (CIT will likely pay 10% over Libor). Plus, bonds coming due in the next few months could be paid off if CIT is kept around a bit longer. Perhaps CIT's bondholders also took a note from Chrysler's and GM's bankruptcy proceedings, deciding that they'd get greater recovery value outside of bankruptcy court.

Still, the loan could prove to be more band-aid than permanent solution depending on CIT's ability to drastically restructure and reduce debt. It's a sizeable undertaking with little chance of success, but it's also highly doubtful a CIT failure would lead to systemic problems. But the bondholder bailout is an encouraging sign that solving Financials' problems is being shifted from the public to the private sector. Indeed there are other signs Financials are relying on the government less for liquidity.

CIT's future is anything but certain, but whether it survives or fails, it likely won't go down in history as the "next shoe to drop." Pessimists have been waiting anxiously for another shock to the financial system—but they'll be waiting for that falling footwear in vain if the financial system continues to improve 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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