Commercial lender CIT Group confirmed late Monday that it has secured a $3 billion bailout from its bondholders, saving the company from bankruptcy protection.
It's a new twist in the financial crisis: A major bank on the verge of a last-minute rescue—only this time the bailout isn't coming from the government. The deal marks the first time since the banking crisis erupted that private investors are stepping in to save a big financial firm without federal help or oversight.
Shares of CIT leaped 78.57 percent Monday to close at $1.25. The stock rose about another 4 percent in extended trading.
CIT said 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 lender also is moving to immediately restructure its debt to provide additional liquidity and further strengthen its capital position.
"With today's announcement, our board of directors, management team, advisers, 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.
CIT has 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. 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.
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 turns off the bailout spigot.
The negotiations' success, along with robust earnings reports last week by several big banks, may raise hopes that private 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."
CIT lends money to nearly a million small and midsize U.S. companies. It was forced to turn to bondholders for help after the government refused to save the company last week, a sign the administration is pulling back on costly and unpopular bank rescues.
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 restructure its debt. It does not guarantee CIT will avoid bankruptcy.
Ahead of the deal's confirmation investors sent shares of CIT jumping 55 cents, or 78 percent, to $1.25 in trading Monday.
"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, Massachusetts.
Had CIT been allowed to collapse, some experts feared it would have dealt a crippling blow to an economy still bleeding hundreds of thousands of jobs a month despite a nearly $800 billion federal stimulus program.
The retail sector would have been hit especially hard. CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing.
"If CIT had gone under, that would have left a huge hole in the supply chain," said Craig Shearman, a spokesman for the National Retail Federation, one of the trade groups that had urged the government to prevent CIT's collapse.
Government's New, Hands-Off Approach
By not getting involved, the administration gambled CIT was not so enmeshed with the financial system as companies like Citigroup, Bank of America and others banks that accepted federal bailout money, analysts said.
"The government's sitting there saying, 'If this doesn't set off a meltdown of the financial system, there's no rationale to bailing out creditors,'" said Daniel Alpert, managing director of the investment bank Westwood Capital LLC.
CIT, squeezed as its debt has come due and borrowers have drawn down their credit lines, has been scrambling to raise $2 billion to $4 billion. It received $2.3 billion from the government's Troubled Asset Relief Program last fall—money that could be lost if CIT files for bankruptcy.
The Federal Reserve put the company through its "stress test" last week and found it faced a $4 billion capital shortfall. It has more than $7 billion in debt due in the first quarter of next year.
CIT had been in round-the-clock talks with regulators to reach a deal for emergency funding before talks broke down last week. The company had warned that depriving it of more federal aid could imperil about a million corporate borrowers.
Once talks with government officials fell apart, CIT turned to some of its major bondholders for financial help. They struck a deal late Sunday.
Federal officials were not involved in the negotiations that led to Sunday's deal, a Treasury official said Monday. He spoke on condition of anonymity because he wasn't authorized to discuss the matter. The government's hands-off approach marks a major shift in the crisis.
In the past 16 months, the government has poured billions into stumbling mega-banks like Citigroup and Bank of America. It's also provided guarantees or guidance on the sales of Bear Stearns, Washington Mutual and Merrill Lynch.
But the biggest U.S. banks still enjoy federal support through borrowing or debt guarantees. So how far the government is willing to go with its hands-off policy is unclear.
"The question is, does it only apply to the small- and medium-sized guys, or does it apply to everyone?" 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.
New York-based CIT was negotiating with six key bondholders, including bond manager Pimco. CIT's chairman and CEO, Jeffrey Peek, was actively involved in the talks, according to a person briefed on the matter. The person spoke to The Associated Press on condition of anonymity because the talks are confidential.
Scott Talbott, top lobbyist with the Financial Services Roundtable, which represents CIT and other big financial firms, said the government's seeming pullback from the banking sector was a welcome sign.
- CNBC.com staff contributed to this report.