Could CIT still face bankruptcy?

September 17, 2009 – 1:55 pm – No Comment

CIT Group Inc. said that it might still have to file for bankruptcy protection if there isn’t a strong presence of bondholders to participate in a debt exchange that was recently introduced.

CIT is a commercial lender, that is one of the country’s largest lenders to small and medium sized companies, that borrowed $2.3 billion in TARP funds, which would be completely lost if the company decided to file for bankruptcy. The announcement that it may file for bankruptcy came only a day after major bondholders decided to provide the company with a $3 billion rescue loan. However, in a filing with the SEC, the company said that the loan from the bondholders may still not be enough to relieve the financial problems in the company. The loan doesn’t come cheap for the company, the minimum interest rate on it is 13% due to the risk the lenders are taking.

According to the company, it needs to pay back about $7 billion in debt that is maturing through the next year, one billion of that will mature in August alone. The company was forced to ask bondholders for the cash when the government basically told it that it was on its own and would not give the company any more money.

If the company cannot get enough tender offers for the debt which is coming up in less than a month, it will likely file for bankruptcy protection. If it were to collapse, there is a chance that it would be a very hard blow to the economy and the retail sector will be hit particularly hard as CIT is a large short term lender to around 2,000 vendors that supply merchandise to approximately 300,000 stores.

If CIT is allowed to go under, which it most likely is unless it can raise the capital on its own, then there will definitely be some kind of ripple effect that goes throughout the retail sector and everyone will feel it. Stores may not be able to get merchandise in and prices for retail items may even go up since suppliers can’t get funding for merchandise.

I sincerely hope the company doesn’t go out into bankruptcy because our economy is already hurting, a blow like this would cripple it.