CIT Lives, but What's Left for Shareholders?

They live!

Middle market lender CIT Group (NYSE: CIT  ) inked a deal for $3 billion in debt financing late Sunday with a group of six very savvy investors, including PIMCO -- the world's largest bond fund manager -- and Seth Klarman's Baupost Group. Two of CIT's existing creditors, Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) had dropped out of discussions to provide further financing on Friday.

Extending the fuse
CIT will pay a punitive rate on the loan (10% over the interbank rate) and has pledged some of its highest-quality loans as collateral. But CIT's walk through the desert isn't over yet -- the $3 billion in new financing buys the company time, but it's no permanent fix. CIT remains intent on seeking government approval to transfer assets to its bank subsidiary, for example.

Still, the present outcome is a positive indicator for the broader market: When the government steps aside (as it was reasonable to do under these circumstances), lo and behold, private capital is ready to step into the breach. This latest development is proof positive that there is risk capital out there and that market mechanisms can function properly.

Shareholders: looking ahead
Does CIT have a viable business at its core? Yes: Asset-based lending -- like any other form of lending -- can be profitable when it is performed rationally. GE Capital (a unit of General Electric (NYSE: GE  ) ), Bank of America (NYSE: BAC  ) , and Wells Fargo (NYSE: WFC  ) are all active in this area.

While news of the rescue has pushed the shares up 80% so far today, investors should ask themselves: What will be left for existing equity holders once the business is restructured (a restructuring will likely include debt-for-equity swap by bondholders). Bankruptcy has been averted, but I'll repeat my warning that CIT remains highly speculative -- unless you're part of the group providing the rescue financing.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


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  • Report this Comment On July 20, 2009, at 5:24 PM, paultaut wrote:

    I do not really care whether CIT performs as long as it survives and continues paying on its PFDs.

    The PFD series C has a Coupon of 8.75% and an issue price of $50. You do the Math.

  • Report this Comment On July 21, 2009, at 12:13 PM, AJ30 wrote:

    CIT is unique because many aspects of asset-based lending are unique. You can't "grow" a Factoring Division overnight and BA and WF and GE don't have a clue on how to do it. Many other aspects of CIT's business are equally experience oriented. This financial support for small and mid-sized manufacturers is essential.

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