CIT Group Inc has clinched $3 billion of emergency financing from bondholders, keeping the struggling lender out of bankruptcy, a person close to the matter said.
The pact has been approved by CIT's board and could be announced on Monday, the source said. A rescue could strengthen CIT's finances while allowing more time for the 101-year-old lender to small and mid-sized businesses to restructure its debt outside the bankruptcy process.
A bankruptcy could have rippled through the economy by making it impossible for businesses to obtain needed cash for day-to-day operations. Some analysts, though, said CIT's problems may still lead to a bankruptcy filing eventually.
In early-afternoon trading CIT shares were up 63 cents, or 90 percent, at $1.33 on the New York Stock Exchange.
According to published reports, CIT would pay interest on the financing of 10 percentage points more than the three-month London Interbank Offered Rate. This equates to an annual rate of about 10.5 percent.
The bondholder group includes Pacific Investment Management Co, a unit of Allianz SE, and other large investors, and is expected to provide financing with a 2 1/2-year term, two people familiar with the matter said.
This financing would be backed by unsecuritized CIT assets, which probably exceed $10 billion, one of the sources said. The sources requested anonymity because the talks are private.
A rescue would help CIT address a looming $1 billion bond payment due next month. It would not necessarily restore longer-term confidence in CIT's health, after a liquidity squeeze exacerbated by customers who drew down credit lines.
The deal is a negative for bondholders as it does not fix the underlying problem and layers in more secured debt, wrote CreditSights Inc analysts Adam Steer and David Hendler. Without a viable funding model, we believe CIT may still be at risk of filing for bankruptcy.
CIT spokesman Curt Ritter declined to comment after initial reports of the rescue. He was not available on Monday.
A rescue could also 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 bankruptcy would make CIT, with $75.7 billion of reported assets, the largest U.S. financial company to go bankrupt since Lehman Brothers Holdings Inc last September.
CIT's problems 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, both potentially highly profitable but fraught with added risk.
After last-ditch rescue talks with the government failed last week, the Obama administration said it was setting high standards for granting aid to companies.
The government's decision surprised Peek, leading him to seek help from private investors, one of the people familiar with the matter said.
CIT has about $40 billion of long-term debt, according to CreditSights, and has lost close to $3.3 billion since the end of 2007.
Late last week, industry groups including the National Retail Federation, the National Council of Chain Restaurants and the National Council of Textile Organizations urged U.S. Treasury Secretary Timothy Geithner to take action to ensure that CIT remains viable.
On Monday, it cost $4.3 million upfront plus $500,000 annually to insure $10 million of CIT debt against default 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, according to bond pricing service Trace.
The company has been scheduled to report second-quarter results on July 23. It was unclear how the bailout talks might affect the timing of that report.
(Reporting by Jennifer Ablan, Paritosh Bansal, Michael Erman, John Parry, Ransdell Pierson and Jonathan Stempel; Editing by Lisa Von Ahn and John Wallace)