While lender CIT Group cit fights for survival, many of its small and midsize business customers are lining up new lenders, and its rivals are angling for its business.
CIT may have bought itself some time. The board of CIT Group, one of the nation's largest lenders to small and midsize businesses, approved a deal with major bondholders to keep the company out of bankruptcy, two people briefed on the talks told the Associated Press on Monday.
CIT will receive a rescue loan from key bondholders hoping to keep it alive long enough to restructure its debt, these people said. They spoke on condition of anonymity because the company has not yet made an official announcement.
The deal will not necessarily prevent a bankruptcy filing for the ailing firm, but will give it desperately needed breathing room while it attempts to refinance existing debt. CIT has a $1 billion payment due in August.
Shares of CIT jumped in trading Monday.
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.
It's almost as if investors have quarantined CIT's problems. All this while the value of CIT's bonds has fallen to about 50 cents on the dollar and the stock price is off about 85% this year to 70 cents a share on Friday.Such resilience in the face of CIT's uncertain fate is a sign of how much better the financial system is withstanding this shock. CIT's trouble "doesn't seem to have the systematic risk as Lehman did," says Marilyn Cohen of money manager Envision Capital.
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