(BN) CIT Said to Weigh $3 Billion Bondholder Funding Offer (Update2)

By Pierre Paulden and Linda Shen
July 20 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial finance company seeking to ward off bankruptcy, may announce an agreement for $3 billion in financing from bondholders as soon as today, a person briefed on the board’s deliberations said.
The lender’s board accepted the deal late yesterday, the New York Times reported. The funds would give the New York-based company a chance to restructure its debt outside of bankruptcy, said the person, who declined to be identified because the talks are confidential.
CIT needs time to strike deals with bondholders to reduce debt after the U.S. declined to give the firm a second bailout.
CIT, which reported $3 billion of losses in the last eight quarters, received a $2.33 billion rescue in December after converting to a bank holding company to be eligible to sell bonds backed by the Federal Deposit Insurance Corp.
"We still think it is a losing effort in the intermediate term although some bondholders may end up better than others with this structure," said David Hendler, an analyst at CreditSights Inc. in New York. "The wholesale model is dead and creating a branch deposit system from scratch is too expensive for CIT and takes too long to build to help any time soon."
The financing will carry an initial rate of about 10.5 percent, the New York Times said. Creditors including Boston- based hedge fund Baupost Group LLC, CapRe, Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silverpoint Partners agreed to provide the money, the Financial Times reported separately. Barclays Capital is arranging the funding, the newspaper said.

Maturing Debt

Chief Executive Officer Jeffrey Peek didn’t return a call seeking comment. CIT shares jumped 83 percent to $1.28 in European trading from their 70-cent close on the New York Stock Exchange on July 17.
CIT, which has posted losses on home mortgages, student loans and credit to commercial customers, has $1 billion of floating rate notes due next month. The company has $10 billion of debt maturing through next year including a $2.1 billion credit line in April. CIT shares have tumbled 82 percent since June 1.
Earlier, bondholders held calls to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation. CIT finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc.
Pimco, which manages the world’s biggest bond fund, is CIT’s largest bondholder according to regulatory filings. Mark Porterfield, a spokesman for Pimco, didn’t immediately respond to a phone call and an e-mail seeking comment.

Taxpayer Money

Insurers are also among CIT’s largest investors. Aflac Inc., the world’s biggest seller of supplemental insurance, had about $240 million in CIT senior debt at the end of March and Richmond, Virginia-based Genworth Financial Inc. had about $178 million of the notes, Jeffrey Schuman, an analyst with KBW said last week in a report to investors. Insurers may have changed their investments since the end of the first quarter, and portions of the holdings may be protected by hedges, Schuman said.
CIT’s advisers, including JPMorgan Chase & Co. and Morgan Stanley, discussed with other banks about a debtor-in-possession loan to fund the company’s operations should it enter bankruptcy, people with knowledge of the matter said last week.
Meanwhile, bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter. Thomas Lauria, a lawyer at White & Case LLP, said in an e-mail that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy.

FDIC Concern

The demise of CIT, which has almost $76 billion in assets, would represent the largest bank failure by that measure since regulators seized Washington Mutual Inc. in September.
The FDIC, led by Chairman Sheila Bair, was concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.
CIT has said its bankruptcy would put 760 manufacturing clients at risk of failure and "precipitate a crisis" for as many as 300,000 retailers, according to internal documents.
CIT accounts for about 70 percent of all short-term U.S.
financing known as factoring, worth about $40 billion annually, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey. In factoring, one company purchases another’s accounts receivable.

Alabama Bankruptcy

Moore-Hendley Inc., an Alabama-based company that supplies tools and other items to hardware stores and home centers, became the first to blame CIT for its bankruptcy. The company said in court papers it was forced into Chapter 11 because it had difficulty getting financing from its lender, CIT.
CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents July 17, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.