CIT Is Said to Obtain Urgent Loan to Prevent Bankruptcy

Published: July 19, 2009

Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan, according to people briefed on the matter.

The deal will buy CIT some time to restructure its business model and reduce its voluminous debt load, after the company failed to win crucial concessions from Washington regulators. The company had planned to file for bankruptcy protection as soon as Monday afternoon if it could not attract enough capital from private investors, including big bondholders and its banks.

Under the terms of the deal, CIT would receive $3 billion from some of its main bondholders, though at an initial rate of about 10.5 percent. 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.

CIT’s board approved the deal around 10:30 p.m. Sunday, these people said.

For more than a week, CIT, which is 101 years old, posed a difficult question for regulators: Should they step in to save yet another foundered financial institution?

Regulators felt some political pressure to intervene, because of CIT’s big presence in lending to small businesses across the country and because the government had already invested $2.33 billion in the company.

But officials eventually concluded that CIT, unlike the banks that were bailed out last year, posed no risk to the global financial system, leaving its fate in the hands of the private market.

The plan was formed after days of round-the-clock negotiations between CIT and its financial and legal advisers, and a group of large bondholders represented by the investment bank Houlihan Lokey Howard & Zukin and the law firm Paul, Weiss, Rifkind, Wharton & Garrison. The two firms previously represented the biggest group of large bondholders in General Motors.

Jeffrey M. Peek, CIT’s chief executive and the architect of the lender’s ill-timed aggressive push into subprime mortgages and student loans, was active in the financing talks, according to people briefed on the matter. Mr. Peek, a longtime banker who lost a race to become Merrill Lynch’s chief executive, called upon many of his acquaintances on Wall Street to provide some form of aid.

Even as CIT negotiated with its bondholders, it also had teams from the investment bank Evercore Partners and the law firm Skadden, Arps, Slate, Meagher & Flom prepare for a potential Chapter 11 filing. Several advisers, including JPMorgan Chase and Morgan Stanley, had begun preliminary discussions about raising $2 billion to $3 billion in debtor-in-possession financing, money needed to get a company through bankruptcy.

It remains unclear whether CIT’s long-sought lifeline will be enough to give it the room to make crucial changes to its business at a time when it is unable to obtain financing from the capital markets. While it maintains a bank subsidiary in Utah, the company has traditionally relied on money that it borrows in the capital markets to make loans to its customers.

Once the credit markets froze and investors became leery of CIT’s loan portfolio, the company was in peril.

Were CIT to fail, the company — with $75 billion in assets — would become the largest casualty in the finance sector since Lehman Brothers collapsed last fall. Since then, federal regulators have been pumping billions of dollars into numerous banks across the country to prop them up and create some stability in the financial system.

A failure of CIT could have sent ripple effects through the nation’s small and midsize businesses. While most of its portfolio consisted of term loans, the company dominated the market for factoring, a type of lending common within the manufacturing and retail sectors.

Many analysts and federal regulators have questioned why CIT did not try to change its risky business model sooner. Last December, amid the market turmoil, the Bush administration rushed through the company’s application to become a bank holding company and gave it $2.33 billion through the Troubled Asset Relief Program.

Yet the company made no move to build a sturdier business model. Instead, it applied for access to a program through the Federal Deposit Insurance Corporation that has allowed Goldman Sachs and other banks to issue their debt cheaply with the backing of the agency.

Sheila C. Bair, the chairwoman of the F.D.I.C., does not view the program as a bailout solution for banks and financial institutions, a government official briefed on the situation said.

When that door closed last week, CIT executives still held out hope that they would receive approval from regulators to transfer $10 billion in assets to the company’s Utah bank, a move that would have given it access to loans from the Federal Reserve. But regulators demanded that such a move be accompanied by CIT’s raising a significant amount of private capital, which at the time seemed nearly impossible.

A third front of the debate was whether, after throwing large sums of money to some of the nation’s largest banks, the Obama administration was doing enough to brace up institutions that lend money to smaller businesses. Many of those large banks, including JPMorgan Chase, Goldman Sachs, Citigroup and Bank of America, reported either record or substantially improved results last week.