Middle market lender CIT Group
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
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.