CIT Group Inc secured a $3 billion loan facility from its bondholders on Monday and said it plans a comprehensive restructuring of its liabilities, but gave few details.
With the emergency loan, the 101-year-old lender to small and mid-sized businesses warded off a threat of imminent bankruptcy, but many experts questioned its ability to survive in the current form.
Several analysts and bankers said earlier in the day that the rescue financing might only delay a bankruptcy filing, in light of skittishness among CIT customers and the New York-based company's inability to readily tap capital markets.
Some new organization has to emerge. CIT's current business model is broken, said Michael Goldsmith, a managing director at financial advisory firm BBK.
The loan gives the lender more time to restructure its debt, and preserves the ability of thousands of businesses to obtain cash needed for day-to-day operations.
The company, which lends to nearly one million small and mid-sized businesses, said as a first step in its recapitalization plan, it has started a cash tender offer for its outstanding floating rate senior notes due August 17.
The offer will be for $825 for each $1,000 principal amount of notes tendered on or before July 31.
CIT said it and a bondholder committee will work on the balance of the recapitalization plan, which is expected to include a comprehensive series of exchange offers designed to further enhance CIT's liquidity and capital.
The company canceled its plan to report second-quarter results on July 23, saying it would now do so when it files its quarterly report on Form 10-Q.
CIT's shares, which closed up 78.6 percent at $1.25 on the New York Stock Exchange, were up another 9 cents, or 7.2 percent, to $1.34 in after hours trading.
The $3 billion secured term loan has a 2.5 year maturity. The term loan proceeds of $2 billion are committed and available now, with an additional $1 billion expected to be committed and available within 10 days.
CIT would pay interest of 10 percentage points above the three-month London Interbank Offered Rate, a source familiar with the matter said. This equates to an annual rate of about 10.5 percent.
This financing would be backed by unsecuritized CIT assets, which probably exceed $10 billion, another source previously said.
The rescue from a group of its major bondholders, which sources have earlier said includes Pacific Investment Management Co, was approved by CIT's board after negotiations over the weekend.
An official announcement of the rescue had been expected as early as Monday morning but was delayed by regulatory issues, a person familiar with the matter said.
Restructuring experts said CIT has some valuable businesses that could be acquired or survive as part of a scaled-down CIT, including its factoring business.
Factors buy receivables, or the right to receive money owed, from suppliers at a discount so that those suppliers can continue to have working capital. CIT gets paid back when retailers sell goods, typically within 90 days.
Retail industry groups last week urged U.S. Treasury Secretary Timothy Geithner to act to ensure CIT's survival.
CIT had sought emergency federal funding, but talks with the government broke down last week. The Obama administration appeared to draw a line as to how readily it would bail out troubled companies, following several big corporate bailouts over the last year.
The bondholder rescue could preserve the government's $2.33 billion investment in CIT from the Troubled Asset Relief Program. CIT became eligible for such financing when it became a bank holding company in December.
A rescue comes as a great relief for retailers preparing for the back-to-school and holiday shopping seasons, said Tracy Mullin, chief executive of the National Retail Federation.
CIT could not be allowed to fail at a time when retailers are already struggling to survive, she said in a statement.
Problems at CIT mushroomed two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans.
Last week's government decision not to provide aid surprised Peek, who then led the company's efforts to seek help from private investors, one of the people familiar with the matter said.
CIT has about $40 billion of long-term debt, CreditSights said. It has lost close to $3.3 billion since the end of 2007.
A bankruptcy would have made CIT, with $75.7 billion of reported assets, the largest U.S. financial company to go bankrupt since Lehman Brothers Holdings Inc last September.
The cost of insuring CIT debt against default declined with news of the rescue. On Monday, it cost $4.3 million upfront plus $500,000 annually to insure $10 million of CIT debt for five years, down from $4.45 million upfront on Friday, according to Phoenix Partners Group.
CIT debt maturing in three to five years yielded in the mid-20s to mid-30s percent, according to bond pricing service Trace.
Evercore Partners and Morgan Stanley are CIT's financial advisors, while Skadden, Arps, Slate, Meagher & Flom LLP and Wachtell, Lipton, Rosen & Katz are legal counsel for the financing and restructuring plan. Barclays Capital is arranger and administrative agent for the term loan financing. Latham & Watkins is legal counsel to Barclays.
(Reporting by Jennifer Ablan, Paritosh Bansal, Megan Davies, Chelsea Emery, Michael Erman, Joseph A. Giannone, Jessica Hall, John Parry, Ransdell Pierson, Phil Wahba and Jonathan Stempel; Editing by Gerald E. McCormick, John Wallace and Carol Bishopric)