Saturday, July 11, 2009


From Bloomberg:
CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds.
It's over for CIT. FDIC refused to provide a guarantee for CIT debt the way it did for banks (including GMAC). This is probably the right decision from the taxpayers' perspective, but a hit to the US economy nevertheless. CIT in many ways was more critical to small and medium size businesses than most banks. These are the same businesses that employ millions of people. Most won't be able to get new financing, won't be able to grow, many will shut down. This alone will wilt many "green shoots" of the supposed recovery.

Banks are notorious for having buckets for their products, and if a specific business need does not fall into the bucket, banks generally can't help. CIT was there to provide flexible business loans, finance receivables (to bridge cash flow gaps), and solve other small business problems. They did it quickly without all the red tape that is so common for large banks.

The CDS spiked last week, trading 38 points upfront. With nearly 100% probability of filing, this level prices recovery for unsecured debt at 62%. Seems high, but there isn't a great deal of secured debt above.

CIT CDS spread equivalent
The preferreds have collapsed again (as they did early in the year) to $4.70 (see chart below) and the common shares are at $1.53 (should probably be at zero). CIT's hopes of a mid-09 US recovery just weren't realistic.

Anyone out there looking for a heavily discounted middle market loan portfolio? Highly diversified - almost a million business loans... anyone?

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