Contingency plans take shape as CIT teeters

ByABC News
July 19, 2009, 10:38 PM

— -- CIT may have bought itself some time. Late Sunday, the company's board of directors was to review a proposal to borrow additional money from its bondholders, a plan that could allow the company to avoid a bankruptcy filing, according to a person familiar with the plan. The plan, first reported on The Wall Street Journal's website, could provide $3 billion in financing.

The person would not allow his name to be used because there was no final deal yet.

Late Sunday night, The New York Times and the Financial Times and Reuters reported the board had approved the deal. USA TODAY was unable to confirm the reports.

CIT's fate is being closely watched because hundreds of thousands of companies, ranging from apparel makers to retailers, rely on CIT financing for cash to keep their businesses running.

Further trouble at the bank holding company could hurt some retail and manufacturing customers unable to obtain credit elsewhere, but the company's scramble to save itself has not set off alarms in the financial markets. This latest test to the nation's financial system is a stark contrast to the aftermath of Lehman Bros.' failure last September, an unexpected event that paralyzed credit and stock investors.

One difference is CIT's smaller size. A CreditSights report last week estimated CIT's lending supports less than 1% of U.S. retail and manufacturing business. But another difference this time is that lenders and borrowers are doing more to prepare for an event that could wreak further damage on a weak economy. Furthermore, there apparently is private capital this time willing to hold up CIT without additional government assistance.

"With the run-up to the (failures) of Fannie Mae, Freddie Mac and Lehman, the markets came unglued," says Michael Darda of trading firm MKM Partners. "That's not happening now. It's something the system can absorb."

Observers have been pleasantly surprised with the market's ability to look past the teetering of CIT and adjust. Even as the CIT soap opera unfolded last week, stocks rose more than 7% to score their second-best week of the year, based on the broad Wilshire 5000 index. The bond market has enjoyed an impressive rebound this year. The prices on corporate debt of highly rated U.S. companies are rebounding, driving yields down nearly 50% from Dec. 31, to 3.13 percentage points above Treasuries with similar maturities, Merrill Lynch notes.