Bondholder loans save CIT, for now
by Lisa Fleisher and Joseph R. Perone/The Star-Ledger
Tuesday July 21, 2009, 11:32 AM
For decades, CIT Group was the company that helped finance businesses with specific needs -- such as retailers stocking shelves with fall fashions or law firms buying heavy-duty copiers -- often when other lenders refused.
Now, the company with corporate offices in Livingston has turned to Wall Street to get last-ditch funding of its own, after Washington refused. Analysts say that may not be enough.
Facing a mountain of debt and no help from the government, CIT has borrowed $3 billion from its bondholders, helping it avoid bankruptcy, the company confirmed late yesterday.
Seth Wenig/APThe board of CIT Group Inc., 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.
Despite market euphoria -- its battered stock jumped 78.5 percent to $1.25 a share in trading yesterday -- analysts say the lifeline is a temporary reprieve that buys CIT time to restructure without filing for bankruptcy. The company, which employs nearly 1,000 people in New Jersey, might have to cut jobs and sell some assets to stay alive, analysts said.
The money was called a "stop-gap" for a company that in March estimated it needed $10 billion to make it through the next 12 months.
"It's not a positive thing, it's just a better thing than being in bankruptcy," said Kathy Shanley, a senior analyst with Gimme Credit, a debt research firm.
CIT did not respond to requests for comment.
Analysts say the company's key mistake in recent years was trying to boost its stock price by jumping into risky credit markets -- such as subprime home and student loans -- that provided short-term booms and then crashed hard, along with the economy.
There is still plenty of risk for CIT because bondholders gave it only interim financing, said Joseph Saluzzi, cofounder of Themis Trading, a money manager in Chatham.
"This is a Band-Aid put on by major bondholders," Saluzzi said. "I wouldn't be surprised if this blew up in their faces."
A CORE OF SMALL LOANS
Founded in 1908, CIT gave loans to small businesses when major banks would not, lending to minorities, Jews and women, said David Hendler, an analyst with CreditSights. The first auto enthusiasts could buy Studebakers in 1916 with CIT loans, and the company financed military equipment in World War I.
Though it has expanded into other industries, those small loans are still at its core and make the company invaluable to thousands of businesses across the country.
CIT provides lines of credit that allow small- and mid-size companies to lease equipment and pay for inventory, said Michael Alter, president of SurePayroll, a Chicago company providing online payroll processing for small companies.
"If CIT had gone under, and you couldn't buy inventory, you would go out of business," Alter said.
CIT plays a critical role in bridging the gap between large manufacturers and small merchants.
There is a financial food chain linking large companies with small companies. The large companies take as long as three months to pay their bills to small vendors, so the small companies need lines of credit to cover payroll and other expenses.
CIT was known throughout New Jersey largely through its former CEO, Al Gamper, who once served as chairman of the Rutgers University board of governors. Gamper, who did not respond to numerous requests for comment, also served on the board of the New Jersey Performing Arts Center in Newark, which received a $1 million gift from CIT toward its construction.
CIT's corporate citizenship waned in the past few years as the company turned an eye to Manhattan, said Peter Hansen, vice president of development at NJPAC. "They were a long-standing, loyal donor and at one point had been one of our largest," he said.
Former Livingston mayor Joe Fiordaliso recalled times when CIT would sponsor or help facilitate events such as a celebration of the Olympic Torch passing through town in 1996. "We don't have a lot of large corporate entities in Livingston," he said. "They were one of the few and participated in the community."
But lately, that presence has been muted. Local business groups tried to reach out a few years back but did not get a response, said Beth Lippman, head of the Livingston Area Chamber of Commerce.
Residents likely know CIT Group exists, but little beyond that, Fiordaliso aid.
"Probably most folks don't even know what they do, frankly," he said. "They went about their business and did their thing and got involved in the community where they could"
A TOUGH DECADE
The company has had a rocky decade, cycling through owners, CEOs and business strategies, analysts said.
The company was desperate for cash after the federal government rejected its request for funding under the Federal Deposit Insurance Corp. CIT had already received $2.3 billion under the Troubled Asset Relief Program, or TARP, in December.
CIT's prognosis is linked to the health of the U.S. economy, said David Ely, a professor of finance at San Diego State University.
"They are still dealing with problem loans and future write-offs," Ely said. Among restructuring moves CIT might consider are selling parts of its loan portfolio, said Daniel Murray, a partner and expert in banking law in the Princeton office of Pepper Hamilton.
"They would have to see which ones are saleable, at what prices and what discount would they be willing to accept," he said.
The lender may have to go back to its roots: serving retailers and providing loans backed by assets -- a low-growth but stable business, said Lynn Tilton, chief executive of Patriarch Partners, a $6 billion New York private equity firm that specializes in transforming distressed companies.
"I'm sure there will be some job losses," she said.
Staff writer Leslie Kwoh contributed to this report.
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