SAN FRANCISCO (MarketWatch) -- CIT Group Inc. has reached a $3 billion rescue-financing agreement with key bondholders that will allow the business lender to avoid bankruptcy and restructure outside court, according to a media report Sunday.
The deal was expected to be announced on Monday, The Wall Street Journal reported in its online edition late Sunday.
The news followed reports over the weekend that CIT had been trying to negotiate rescue financing with a group of bondholders to avoid bankruptcy.
The 101-year-old lender to small- and medium-sized businesses could have filed for bankruptcy as early as Monday if it hadn't reached a deal.
A report by Dow Jones Newswires, also citing unnamed sources, said the plan being considered would involve new funds for CIT instead of a rollover of existing debt. The report said Morgan Stanley has been hired to advise CIT in the restructuring.
Evercore Partners Inc. also was hired as a bankruptcy adviser.
Barclays Capital had estimated that a filing by the company would be the fourth-largest bankruptcy in U.S. history, in between General Motors and Enron. Lehman Brothers still maintains its top ranking in U.S. bankruptcy history.
Major lender to retail
CIT is a major lender to small and medium-sized businesses. Its failure could cause disruptions in the apparel sector and other parts of the retail industry. See related story on how CIT's trouble may ripple across the apparel industry.
However, the government seems to have concluded that the company, with a little more than $75 billion in assets, wasn't too big to fail. Indeed, the company's lending supports less than 1% of the total business in the U.S. retail and manufacturing sectors, CreditSights, an independent fixed-income research firm, estimated earlier this month.
CIT said late Wednesday that talks with government agencies ended and it had been advised that there was "no appreciable likelihood of additional government support being provided over the near term."
CIT scrambled to get short-term financing from debt holders and big banks including J.P. Morgan Chase /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 36.89, +0.76, +2.10%) and Goldman Sachs /quotes/comstock/13*!gs/quotes/nls/gs (GS 156.84, 0.00, 0.00%) on Friday. See full story.
However, its efforts weren't enough.
Allowing CIT to fail would have been a gamble for President Barack Obama's administration. The government has bailed out American International Group /quotes/comstock/13*!aig/quotes/nls/aig (AIG 13.52, +0.77, +6.04%) and pumped tens of billions of dollars into big banks including Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 3.02, -0.01, -0.33%) and Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 12.85, -0.28, -2.13%) . But it seems to have drawn the line at CIT.
A lack of action could look like "the government was more willing to bail out Wall Street than small businesses," CreditSights said Tuesday.
TARP loss
A Treasury Department spokeswoman said Wednesday that, even during periods of financial stress, there's "a very high threshold for exceptional government assistance to individual companies."
The government already has a "comprehensive and aggressive strategy to restore stability to the financial system as a whole so that credit flows to both businesses and consumers," she added in a statement.
On Thursday, the spokeswoman confirmed that Treasury will likely lose the $2.3 billion it invested in CIT through the Troubled Asset Relief Program. See full story.
Unsecured
CIT was hit hard by the global financial crisis in two main ways. As the economy ground to a halt and unemployment surged, more of the company's loans went bad and it reported multiple quarters of losses.
More importantly, CIT was one of the largest non-bank lenders in the world, a big part of the so-called shadow banking system that collapsed when the financial crisis erupted last year.
Roughly three-quarters of CIT's funding came from the unsecured debt market, but the company has been shut out of this market for some time. Bank deposits, considered a more stable source of money, made up 0% to 5% of CIT's funding.
CIT became a bank-holding company and got TARP money in December. But that didn't solve its long-term problem: how to borrow money at competitive rates so it could continue lending.
CIT applied for a debt guarantee program run by the Federal Deposit Insurance Corp. but was rejected. Efforts to shift more of its assets to its banking unit, CIT Bank, may also have foundered or may have taken too long.
CIT faced at least $1 billion in debt that needs to be repaid later this year. Customers reportedly drew down more than $750 million from their credit lines, putting even more pressure on CIT's liquidity.
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