Despite an alleged $3 billion rescue by CIT Group's bondholders of the struggling lender, pundits are chiming in to point out today that the deal may be more of a stalling tactic than a long-term solution to avoid Chapter 11.
Over at Reuters, Felix Salmon writes:
For one thing, [the deal] leaves the lender with no unpledged assets at all, which is not a position any financial institution likes to be in. But more to the point, the $3 billion is going to run out very quickly, some time in the first quarter.In a Dow Jones Newswires column, senior writer Donna Childs expounds on the case for CIT's still-likely bankruptcy filing, despite the new cash:
CIT Group Inc. may be close to securing rescue financing from its bondholders but within weeks it is likely to be right back where it started and with JPMorgan Chase & Co., a creditor, poised to wield the sword to cut the Gordian knot.Both commentators point out the sweetness of the deal for bondholders who are loaning CIT the money for the next two and a half years: they get 10 percentage points above LIBOR in interest. Lenders mainly comprised a group of hedge funds such as Baupost Group, Capital Research & Management, Centerbridge Partners, Oaktree Capital Management, Pacific Investment Management and Silver Point Capital.
How could it do it? A commitment of $2 billion in rescue financing on the back of a bankruptcy that could allow CIT's small business customers to be identified, in effect, as financing the company, followed by a good bank-bad bank split.
The lenders aren't the only ones popping the corks, either. Speculators who bought in to CIT Group last week at around 40 cents a share are celebrating outsize gains: Monday, shares more than doubled on the market open, after rising strongly Friday afternoon. But Adam Steer, a CreditSights analyst, told Bloomberg: "I still, ultimately, think because CIT's funding model is not fixed there is a high chance that equity holders will be wiped out."
One particularly interesting observation about the CIT deal is that it was not in any way done with government help. As a result, Katie Benner at CNN Money asks if CIT can end the bailout mentality which permeated the first half of 2009. Benner doesn't share the pessimism that her rivals do:
The bridge financing should give CIT the time it needs to try and pay down or renegotiate the money it owes these lenders. And it significantly increases the odds that CIT will make good on the $1 billion debt payment due to its bondholders this August.That's probably the most likely scenario that will unfold. Crucially, Benner gets the point that a private loan of this sum is a hugely positive sign for risk appetite, as I pointed out that it would be last week.
CIT had already received $2.3 billion last fall from the government's Troubled Asset Relief Program; that money would have been lost if CIT had been forced to declare bankruptcy. The New York-based firm's ability to craft its own rescue deal could help reassure those people worried that the banking system would forever need Uncle Sam's support in order to function.
While it is still certainly possible that CIT may have to file for bankruptcy ultimately, it's probably a lot less likely than pundits and analysts would have you believe. One key point which the criticism misses is the huge change in sentiment of a company's creditworthiness brought about by pulling off such a deal. The first investors are always the hardest to find: after that, finding more institutions willing to bridge future gaps is usually much easier, not to mention cheaper.
Disclosure: I own shares in CIT Group.