CIT avoids bankruptcy through $3 billion bondholder deal

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Good news! I was wrong. Yesterday morning I predicted that CIT Group (CIT) would file for bankruptcy over the weekend. I am happy to report that CIT has avoided that fate and has worked out a settlement with its bondholders. Although the details are not yet available, it appears that CIT has reached a deal with bondholders which will give it $3 billion worth of financing for 2.5 years at a 10.5 percent interest rate -- and enable CIT to avoid a bankruptcy filing.

CIT provides financing for a million small businesses such as Dunkin' Donuts and it has $40 billion in long-term debt which it is having trouble repaying. Many expected CIT to file for bankruptcy as it sought $6 billion in debtor-in-possession financing. However, this bondholder deal -- which would give CIT several weeks to set up an exchange of bondholders' debt for equity thus relieving some pressure from billions of dollars in obligations-- would avert a bankruptcy filling.

This is great news for anyone who bought CIT stock on Thursday on the off chance that CIT could avoid bankruptcy. On Friday, its shares closed up about 71 percent at 70 and it is likely to rise further when it opens on Monday. Meanwhile, CIT's customers are no doubt heaving a sigh of relief knowing that they will not have to scramble to find alternative sources of financing.

If this deal goes through, it will prove that President Obama was right not to use more government money to bail CIT out of its jam. It remains to be seen how hard a bargain those bondholders negotiated with CIT.

Peter Cohan is president ofPeter S. Cohan & Associates. He alsoteaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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