CIT Bondholders Agree to Finance $3 Billion Rescue

July 20 (Bloomberg) -- CIT Group Inc.said bondholders agreed to provide $3 billion in emergency financing, giving the 101-year-old commercial finance company time to devise a recovery plan that averts bankruptcy.

CIT, led by Chief Executive Officer Jeffrey Peek, is receiving a $3 billion secured term loan with a 2 ½-year maturity, the New York-based firm said today. Loan proceeds of $2 billion are available immediately and the rest is expected within 10 days, the company said.

The group of bondholders stepped in after the U.S. declined to give a second bailout to the firm, which posted $3 billion of losses in the last eight quarters. The lender finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc., and Moody’s Investors Service said July 16 CIT probably would go bankrupt. CIT has $1 billion of notes that mature August 17 and is asking investors to swap those notes for 82.5 cents on the dollar.

“Anything that buys them time is a good thing,” said Hank Calenti, an analyst at Royal Bank of Canada in London, before the announcement. “There’ll be pain all round if CIT goes under, because they finance entrepreneurs, small businesses that no one else will touch.”

Model Needs ‘Fixing’

CIT, once the biggest independent commercial finance firm in the U.S., sold for more than $61 a share in February 2007 on the New York Stock Exchange. The shares have since plunged to less than $2.

A bondholder bailout of the company “means they’re not going to file tomorrow,” said Adam Steer, an analyst with CreditSights, before the plan was released. “I still, ultimately, think because CIT’s funding model is not fixed, there is a high chance that equity holders will be wiped out.”

Investors who exchange their holdings in the August notes by July 31 are being offered 82.5 cents on the dollar, while those who swap later will receive 80 cents. The offer requires 90 percent approval.

CIT’s $1 billion in floating-rate bonds that mature next month climbed 17 cents on the dollar today to 87.5 cents on the dollar, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond fell as low as 63 cents on the dollar on July 16, Trace data shows.

Pimco’s Stake

Barclays Capital is arranging the funding, CIT said. Creditors include Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silver Point Capital LP, a person familiar with the deal said today. Spokesmen for the funds either declined to comment or didn’t reply to phone calls or e-mails.

Pimco, which manages the world’s biggest bond fund, is CIT’s largest bondholder according to regulatory filings. Mark Porterfield, a spokesman for Pimco, didn’t respond to a phone call and an e-mail seeking comment.

The firm’s plight attracted the attention of the Treasury and Federal Reserve and lawmakers including Massachusetts Democrat Barney Frank, the House Financial Services Committee chairman, on concern that CIT’s bankruptcy might worsen a credit crunch for entrepreneurs. Regulators turned down CIT’s appeals for help last week after Peek, 62, failed to convince officials that ripples from a collapse would threaten the rest of the financial system.

U.S.-Held Stake

The U.S. holds a $2.33 billion stake in the form of preferred stock, acquired as part of a rescue in December financed by the Treasury’s Troubled Asset Relief Program. CIT converted to a bank holding company to also be eligible to sell bonds backed by the Federal Deposit Insurance Corp.

The lender’s setbacks included losses on home mortgages, student loans and credit to commercial customers. CIT has $1 billion of floating-rate notes due next month, according to data compiled by Bloomberg. The company has $10 billion of debt maturing through next year including a $2.1 billion credit line in April.

Earlier, bondholders held calls to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation.

CIT will pay interest of 10 percentage points more than the three-month London interbank offered rate, people familiar with the matter said earlier today. Libor, a lending benchmark, is 0.51 percentage point.

FDIC Concern

CIT’s advisers, including JPMorgan Chase & Co. and Morgan Stanley, held talks with other banks about a debtor-in- possession loan to fund the company’s operations should it enter bankruptcy, people with knowledge of the matter said last week. Bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter.

The FDIC, led by Chairman Sheila Bair, was concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

A halt in CIT’s lending would eliminate a source of funding for small firms when credit was already drying up. Banks tightened loan standards on small firms for 10 consecutive surveys, according to the Federal Reserve’s April poll of senior loan officers, and Advanta Corp., the credit-card company specializing in small businesses, cut off almost 1 million accounts in May after posting three quarterly losses.

CIT has said 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.

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