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CIT Group future remains uncertain

7/22/2009

New York City Reports about commercial lender CIT Group’s potential demise continue to swirl. A Wednesday morning Bloomberg report revealed that Monday’s commitment from Pacific Investment Management Co., Centerbridge Partners LP and the four other bondholders for $3 billion in rescue funds came with a staggering price tag: an interest rate more than 25 times Libor.

Under much-publicized duress, CIT agreed to pay a 5% fee to the creditors and annual interest of at least 13%. On top of that, CIT pledged assets worth more than five times the amount of the loan as collateral.

The major bondholders made an instant $100 million on an investment analysts say is almost risk free, according to the Bloomberg report.

“The terms are egregious,” Dwayne Moyers, the CIO at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds, told Bloomberg. “They ripped the faces off everyone with these terms.”

The turmoil continues. CIT said in a regulatory filing late Tuesday that the loan doesn’t solve the funding challenges and it may be forced to seek bankruptcy protection unless holders of $1 billion in floating-rate notes due Aug. 17 accept 82.5 cents on the dollar for the debt.

CIT rejected over the weekend a General Electric Co. offer of at least $2 billion in loans backed by aircraft, according to Bloomberg sources. While less costly and requiring less collateral than the loans from bondholders, funds wouldn’t have been available until July 31.

The company has said its bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents. In fact, the retail sector would be hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60% of the apparel industry depends on CIT for financing.

Late Tuesday, Microsoft Corp. said it canceled a five-year financing agreement with CIT. Microsoft had signed an exclusive agreement with CIT beginning in France and Switzerland in 2006. The companies expanded the deal to other countries in 2007. Microsoft plans to work with a number of other financial institutions, declining to say how much financing is provided to customers by CIT.

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