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Sources: CIT Group board OKs rescue loan

July 21, 2009|Martin Zimmerman

The $3-billion loan that CIT Group Inc. has stitched together to stave off bankruptcy should keep badly needed credit flowing for now to thousands of small and medium-size businesses -- including many in Southern California.

CIT, one of the nation's largest lenders to small and mid-size businesses, said Monday that its major bondholders had agreed to commit $2 billion in secured funding immediately, with an additional $1 billion expected to be available within 10 days.

The deal avoids an immediate day of reckoning for CIT, which has edged toward collapse in recent weeks as it faced a $1-billion debt payment due next month. The New York lender said Monday that it planned to launch a tender offer to repurchase that debt at 82.5 cents on the dollar as part of a broader financial restructuring.

The prospect of a collapse has raised concerns that thousands of apparel makers and other companies would be forced to cut costs drastically or shut down -- driving up unemployment and dashing hopes for a swift economic recovery.

Word that CIT had avoided collapse for now was welcome news to those small-business owners, who depend on it to finance their day-to-day operations. But the lender still faces $7.4 billion in debt due in the first quarter next year.

"It's good news -- for today," said Steve Barraza, owner of Tianello, a Los Angeles women's wear company. "The money they kept promising us all last week that we never got, we got this morning."

But what happens in March, wondered Ilse Metchek, president of the California Fashion Assn., a trade group that acts as a go-between among apparel designers, manufacturers and retailers and their lenders. "We're still not sure what's going on yet."

CIT, which has posted losses on home mortgages and loans to commercial customers, has faced a cash crunch as its debt comes due and borrowers draw down their credit lines. The company reported a $438-million loss in the first quarter and $3 billion over the last two years.

Talks between CIT and the federal government on a rescue package broke off last week, a sign that the Obama administration is becoming reluctant to bail out troubled financial firms.

CIT is a key provider of factoring services, supplying quick cash for businesses that have significant upfront costs for material and labor. It plays a major role in keeping the retail industry running, financing about 2,000 vendors that supply merchandise to 340,000 wholesalers and retailers nationwide.

Many of those customers are based locally, where the textile and apparel industry is a $33-billion annual business that employs more than 122,000 people, according to the California Fashion Assn.

Other local industries with highly seasonal sales, such as toys, cosmetics and home furnishings, also rely heavily on factoring, Metchek said. Losing CIT would have forced many of them either to line up financing with other factors -- not easy because of CIT's dominant position in the business -- or to go to more traditional lenders such as banks, which generally require reams of additional financial documentation before making a loan.

CIT also has a reputation for fostering innovation by taking a chance on up-and-coming businesses, Metchek said.

"It's a lender that knows the business and knows the participants and says, 'I believe in you and I'm going to take a shot,' " she said. Without CIT, Metchek added, "that stamp of approval is going to be gone. It's going to be 'Show me.' "

Once CIT's talks with government officials fell apart, the lender turned to some of its major bondholders for financial help. They struck a deal Sunday after a weekend of marathon negotiations and the company's board approved it.

CIT has been scrambling to raise $2 billion to $4 billion. The lender received $2.3 billion from the government's Troubled Asset Relief Program in December.

Despite the signs of an improving economy, some CIT clients are already making plans to protect themselves should the lender eventually collapse.

Michael Rosen, president of Michael Stars, a Hawthorne women's wear firm, said the agreement with bondholders "does nothing to fix the problems at CIT, so we will continue to explore other options."

"In the long run, we need to be with a financially secure factor that can handle all our credit, collection and financing needs," Rosen said.

Barraza decided last week while awaiting funds from CIT that it was time to focus less on sales to department stores and boutiques and more on direct-to-consumer sales through his website, Online customers pay by credit card, meaning Barraza's firm gets its cash in 24 hours.

"This could be the one little week that changed the whole course of my business," he said.

Shares of CIT rose 55 cents, or 78%, to $1.25 on Monday. They are down 72% this year.


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