What do you do when you're faced with the prospect of having to file for bankruptcy by next month? CIT Group has a novel solution: hold your financiers to ransom.
The troubled small-business lender, you may remember, struck a deal at the beginning of this week with several hedge funds to provide $3 billion of financing in order for it to stave off the increasingly inevitable Chapter 11 of its 101-year-old history.
But that loan appears to have served as a mere stopgap, rather than a solution, for a bankruptcy filing. Subsequently, CIT claimed that it may still have to file for bankruptcy if there is a cash squeeze. That cash squeeze might be created by around $1 billion of bonds which are due to mature mid-way through next month.
Depending on whom you ask, CIT's latest offer either punishes late exchangers of the notes, or it sweetens the deal for those who deliver the debt to the company before July 31. The firm is offering $775 plus a $50 early delivery payment for every $1000 of securities investors own vs. $800 with a $25 early payment incentive previously.
CIT needs 90 percent participation, since if not then the terms of the $3 billion loan struck earlier this month don't allow for that cash to be used for debt repayment. If it does receive 90 percent participation, then it won't file for bankruptcy, the company announced Friday.
The to-and-fro has left the company's shares in day-trading territory this week, perpetually rising and falling within a 25% band as bankruptcy speculators have joined and left the table in droves.
If this sounds overly-complicated, or even somewhat like a swindle, then that's mostly because it is. In today's environment of higher risk appetite, the extra $25 early payment incentive is more window-dressing than anything else.
But at least it shows that CIT is coming up with rapid-fire responses to its mounting pressures. That's a lot more than can be said for major banks such as Citigroup, JP Morgan, or even Goldman Sachs, which have shown none of the chutzpah in the past seven months that CIT has shown this last seven days. If the lender survives the turbulent process intact, it will be much, much stronger for the experience.
That may be why the Sage of Omaha is eyeing some of CIT's assets for a potential acquisition, aside from the fact that they would make a great fit with Buffett's buy-what-you-know investment philosophy. CIT might be on its last legs, but it would be a bigger mistake to write it off just yet.
Disclosure: I own shares in CIT Group