- banking - bankruptcy - financial crisis - US economy
AFP - Business lending giant CIT Group has negotiated an agreement worth three billion dollars with its bondholders to avoid bankruptcy, US media reported Monday.
Citing unnamed "people briefed on the matter," The New York Times said directors of CIT, which lends capital to small and midsize businesses, had approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a three-billion emergency loan.
The money, arranged by Barclays Capital, is meant to give the company several weeks to set up an exchange of bondholders’ debt for equity, alleviating some of the pressure from billions of dollars in obligations, The Times said.
CIT’s board approved the deal around 10:30 pm Sunday (0200 GMT Monday), the New York paper added.
According to The Wall Street Journal, the deal would charge CIT high interest rates to secure the firm's short-term lending.
The lending firm's bondholders calculate their losses would be higher if it filed for bankruptcy and quickly sold off its assets, according to the financial newspaper.
CIT Group, which specializes in financing for tens of thousands of small and medium-sized businesses, looked this week to be headed for bankruptcy after the US government rejected its plea for a fresh bailout -- after already providing 2.33 billion dollars -- despite fears of repercussions for the overall economy.
Shares in CIT plunged 75 percent to 40 cents in late trading on Thursday on worries of an imminent collapse of the lender. At that time Fitch Ratings downgraded the long-term credit ratings of CIT, saying as much as 35 billion dollars in its debt could be near default.
Under the bondholders' rescue plan, providing a bridge to help its short-term restructuring efforts but not securing the firm's long-term stability, CIT would pay interest rates 10 percent above the London interbank offered rate -- with the current three-month Libor standing at about 0.5 percent -- the Journal said in its online edition.
The decision not to bail out CIT came after the US government injected tens of billions of dollars into the banking system and outlined a policy of helping large firms whose failure could lead to a shock to the financial system.
"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the Treasury said this week.
A US administration official said the decrease in the level of loans granted by CIT Group over the past year indicates that the firm was not too big to fail.
The National Retail Federation said bankruptcy of the major lender could have severe consequences on the retail industry and the nation's economy.
"A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation's economy," said NRF president Tracy Mullin.
In December, CIT Group won approval to change its charter to a bank holding company and received the capital injection from the US Treasury as part of an emergency rescue package.
The company is a major player in industrial loans including aircraft financing, but last year sold its real estate lending and had taken other steps to deal with the unprecedented credit crunch.