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July 20, 2009

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CIT in desperate talks for new financing to avoid bankruptcy

CIT Group Inc was in talks with a bondholder group last Saturday, as the lender tried to hammer out a rescue financing deal before markets opened and avoid bankruptcy, a source close to the situation said.

Talks with the bondholder group, advised by investment bank Houlihan Lokey, for a US$2-billion to US$3-billion financing were expected to continue yesterday with the aim of announcing a deal by this morning, the source said.

If a deal is not reached, the 101-year-old lender that services nearly 1 million small- and mid-sized businesses could file for bankruptcy protection as soon as today, according to the source, who did not want to be identified because talks are private.

Talks are also going on a parallel track for debtor-in-possession financing if the lender has to file for bankruptcy, the source said.

JPMorgan Chase & Co, Goldman Sachs Group Inc, Barclays PLC and Morgan Stanley, which is also advising the company, might take part in a DIP financing, the source said.

CIT spokesman Curt Ritter declined to comment.

The ripples from a potential CIT collapse could be widespread and worsen the effects of the economic downturn for some firms.

In one early sign, an Alabama hardware supplier filed for bankruptcy blaming the CIT situation for its woes.

Moore-Handley Inc said in court papers filed last Friday that it was forced to seek bankruptcy protection "due to difficulties accessing funds" under their financing arrangements with CIT.

Still, the impact of CIT's demise would likely pale by comparison with the collapse of investment bank Lehman Brothers last September, analysts said.

Worsening crunch

CIT gained a bank holding company status in December so it could draw US$2.33 billion of taxpayer money from the United States Treasury Department's Troubled Asset Relief Program.

The company, however, faced a worsening liquidity crunch amid tight credit markets, forcing it to seek further help.

But the Obama administration declined CIT additional help, saying it had set high standards for granting aid to companies, leaving the embattled lender to work out a deal with private investors to avoid collapse.

Talks with JPMorgan Chase and Goldman Sachs for short-term financing did not lead to a deal, leaving the lender to try to get rescue funds from the bondholders.

CIT has about US$40 billion of long-term debt, according to independent research firm CreditSights.

About US$1.1 billion of debt will come due next month, followed by about US$2.5 billion by year end.

Standard & Poor's said last Friday that it was removing CIT from its S&P 500 market index as of July 24 after the close of trade.


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