Investor Relations 101

[Tina]

Issue Date: IR Alert - July 21, 2009

CIT Group's Deal with Creditors — Just Days After Obama's Rejection — Seen As Key Indicator of Investor Confidence
The struggling small business lender CIT Group has persuaded its creditors to provide a rescue package including $3 billion in new loans, buying the company a little more time to resolve its broader financial problems, according to a person familiar with the matter. The Obama administration last week denied CIT's request for a second round of federal aid, pushing the company to the brink of bankruptcy and raising concerns that thousands of small businesses would not survive its demise, the Washington Post reports.

CIT's ability to secure a rescue only days after the government's rejection is an important milestone in the recovery of the nation's financial markets, reflecting renewed confidence among investors. It is also a victory for the administration, which avoided both the political consequences of a bailout and the economic consequences of a CIT bankruptcy, reports Post writer Binyamin Appelbaum.

The New York company provides financing to about 1 million customers, including a Los Angeles sleeping-bag maker, an Alabama hardware distributor and the Dunkin' Donuts chain of coffee shops. The company, which funded its lending with money borrowed on Wall Street, fell into trouble after the capital markets collapsed two years ago, cutting off the flow of new money.

Earlier this month, investors lost confidence in the company's ability to survive as it faced looming deadlines to repay old loans. CIT's share price plummeted, and large numbers of customers started to close their accounts.

The company, which has already received $2.3 billion in federal aid, launched a public campaign for more, in particular seeking permission to participate in a program that helps companies borrow money from investors by guaranteeing repayment. But the Federal Deposit Insurance Corp., which operates the program, has not approved CIT's application over concerns about the company's viability.

Last week, the government told the company that more support would not be forthcoming. CIT then told its investors that they faced a choice between providing more money or taking their chances in bankruptcy court. On Sunday, some of those creditors agreed to provide $3 billion at an interest rate above 10 percent, according to a person who had been briefed on the deal, who requested anonymity because the company has yet to make an announcement.

The deal does not guarantee the company's survival. The company still must find a replacement for its traditional reliance on Wall Street funding. Furthermore, the new loans only add to a debt load that CIT already cannot afford to repay.

The company's likely next step, according to financial analysts, is to offer some creditors shares of its common stock in lieu of repayment. The creditors would lose much of their investments but would profit if CIT's shares eventually recover. Other troubled firms, including Citigroup and automakers General Motors and Chrysler, have used versions of this approach in recent months, arguing to creditors that the alternative is to risk losing even more.

Even if CIT survives, the company's problems already are hurting many of its customers. The company has cut new lending to a minimum, focusing primarily on collecting its existing loans.