Published: Tuesday, 21 Jul 2009 | 4:45 AM ET

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With bondholders coming to the rescue of troubled commercial lender CIT Group, and not the government, a new reality is setting in for investors. With federal bailouts drying up and the economy still in distress, many more financial firms could face bankruptcy. When they do, it will be major private lenders that will have to decide whether to rescue the companies or allow them to fail.

It signals a return to the traditional path for financially troubled firms after nearly a year of government aid.

"It wasn't clear that Treasury wanted this to be a turning point, but that's the way it's worked out," said Simon Johnson, a former chief economist with the International Monetary Fund, now a professor at the Massachusetts Institute of Technology's Sloan School of Management.

Johnson said the markets took so kindly to CIT's quest for private-sector cash that the government "would feel pretty comfortable about" threatening bankruptcy for firms with less than $100 billion in assets.

Bondholders' $3 billion rescue of CIT

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[CIT  Loading...      ()   ] marks the first time since the banking crisis erupted that private investors have stepped in to save a big financial firm without federal help or oversight.

The lifeline for CIT, whose clients include Dunkin' Donuts franchises and clothing maker Eddie Bauer, aims to sustain the company long enough for it to rework its heavy debt load, which includes $7.4 billion due in the first quarter of next year. It does not guarantee CIT will avoid bankruptcy.

CIT said late Monday that the rescue includes a $3 billion secured term loan with a 2.5-year maturity, which will ensure that its small and midsized business customers continue to have access to credit. Term loan proceeds of $2 billion are committed and available immediately, with an additional $1 billion expected to be committed and available within 10 days.

The short-term financing comes at a high price — an interest rate of about 10.5 percent, said a person close to the negotiations who was not authorized to discuss the matter publicly.

CIT also launched a cash tender offer for its $1 billion worth of outstanding floating rate senior notes due Aug. 17, offering $825 for each $1,000 worth of notes tendered on or before July 31, and $800 for notes tendered between Aug. 1 and Aug. 17. Lenders involved in the bailout deal have agreed to tender all of their Aug. 17 notes, CIT said.

The company and the steering committee of bondholders now will work on drawing up a number of debt swap offers designed to alleviate CIT's debt burden and further shore up the company's cash position.

"With today's announcement, our board of directors, management team, advisors, and a steering committee of bondholders, who are lenders under the term loan financing, are now actively focused on a restructuring plan that will better position our company for the long term," said Jeffrey M. Peek, CIT chairman and CEO, in a statement.

New York-based CIT was negotiating with six key bondholders, including bond manager Pimco. Peek was actively involved in the talks, according to a person briefed on the matter.

The deal suggests the appetite for risk in the private sector is increasing, analysts said. It also could provide a framework for other financial rescues if Washington really is turning off the bailout spigot.

Along with robust earnings reports last week by several big banks, CIT's successful private negotiation raises hopes that capital can start flowing again into the beaten-down banking industry, analysts said. That was all but unthinkable just a few months ago.

"You've got private money coming in and essentially giving a vote of confidence" in banks' future profitability, said Vincent Reinhart, former director of the Federal Reserve's monetary affairs division. "It's encouraging."

"It tells me that the appetite for risk is increasing, and people are betting that a recovery is coming," said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass.

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