- The Washington Times - Tuesday, July 21, 2009

A $3 billion rescue of CIT Group by its bondholders would be the first time since the banking crisis erupted that private investors stepped in to save a financial company without federal help — a possible strategy for other troubled banks down the road as Washington shuts off the bailout spigot.

The rescue loan for CIT, which lends to hundreds of thousands of American businesses, aims to keep the company alive long enough to restructure its debt.

The board of CIT, one of the nation’s largest lenders to small- and mid-size businesses, approved the deal with its major bondholders to keep the company out of bankruptcy, said two people briefed on the talks.

They spoke on the 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. The big commercial lender has faced a liquidity squeeze as its debt comes due and borrowers draw down their credit lines.

The deal will give the company about $3 billion, according to published reports.

CIT representatives didn’t immediately return phone calls from the Associated Press to comment on the reported financing deal.

CIT had been trying to reach a deal with the federal government for emergency funding before talks broke down last week. CIT had warned that depriving it of more federal aid could imperil about a million corporate borrowers. But the Obama administration turned down the company’s request, showing it’s drawing a line on federal rescues for troubled financial firms.

A Treasury spokeswoman declined to comment on a possible private-sector rescue of the company, and would not say whether the government was involved in the negotiations.

Once talks with government officials fell apart, CIT turned to some of its major bondholders for financial help. They struck a deal Sunday, after a weekend of negotiations.

The emergency loan would provide temporary financing to CIT so it could launch a debt-exchange offer to free itself from upcoming debt maturities. Under the deal, CIT’s main bondholders would give CIT $3 billion at an initial interest rate of about 10.5 percent, according to a New York Times report.

The Times said the temporary funding would provide CIT time to launch an exchange of outstanding debt for equity. By swapping debt for an equity stake in the company, CIT would no longer have to pay back the debt, which is essentially a loan. Instead, investors would hold an ownership stake in the company.

CIT would have to put up some of its highest quality loans as collateral for the temporary funding, according to a Wall Street Journal report.

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