CIT board OKs plan to stay out of bankruptcy

WASHINGTON (AP) — The board of CIT Group Inc., one of the nation’s largest lenders to small and midsize businesses, approved a deal with major bondholders to keep the company out of bankruptcy, said two people briefed on the talks.

CIT will receive a rescue loan from key bondholders hoping to keep it alive long enough to restructure its debt, these people said. They spoke on condition of anonymity because the company has not yet made an official announcement.

The deal will not necessarily prevent a bankruptcy filing for the ailing firm but will give it desperately needed breathing room while it attempts to refinance existing debt. CIT has a $1 billion payment due in August.

Shares of CIT jumped 55 cents, or 79 percent, to $1.25 in trading Monday.

The big commercial lender has faced a liquidity squeeze as its debt comes due and borrowers draw down their credit lines.

The deal will give the company about $3 billion, according to published reports.

CIT representatives didn’t immediately return phone calls from The Associated Press to comment on the reported financing deal.

CIT had been trying to reach a deal with the federal government for emergency funding before talks broke down last week. CIT had warned that depriving it of more federal aid could imperil about a million corporate borrowers. But the Obama administration turned down the company’s request, showing it’s drawing a line on federal rescues for troubled financial firms.

A Treasury spokeswoman declined to comment on a possible private-sector rescue of the company and would not say whether the government was involved in the negotiations.

Once talks with government officials fell apart, CIT turned to some of its major bondholders for financial help. They struck a deal Sunday, after a weekend of marathon negotiations.

The emergency loan would provide temporary financing to CIT so it could launch a debt exchange offer to free itself from upcoming debt maturities. Under the deal, CIT’s main bondholders would give CIT $3 billion at an initial interest rate of about 10.5 percent, according to a New York Times report.

The Times said the temporary funding would provide CIT time to launch an exchange of outstanding debt for equity. By swapping debt for an equity stake in the company, CIT would no longer have to pay back the debt, which is essentially a loan. Instead, investors would hold an ownership stake in the company.

CIT would have to put up some of its highest quality loans as collateral for the temporary funding, according to a Wall Street Journal report.

New York-based CIT has been negotiating with six key bondholders, including bond manager Pimco. Jeffrey Peek, the company’s chairman and chief executive, 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.

CIT has been scrambling to raise $2 billion to $4 billion. The New York-based lender received $2.3 billion from the government’s Troubled Asset Relief Program last fall. That money could be lost if CIT is forced to file for bankruptcy protection.

The lender faces $7.4 billion in debt due in the first quarter of next year.