20 July 2009

CIT Group Avoids Bankruptcy

CIT Group (no relation to Citibank) is a non-bank lender that specializes in lending to small and medium sized businesses, which was on the verge of bankruptcy last week. Instead, it refinanced $3 billion of its bonds on a bridge loan basis at an interest rate of 10% plus LIBOR. LIBOR rates range from 0.29% per annum for one month loans to 1.46% for one year loans. Prime business assets of the company have been put up as collateral.

The combined interest rate that CIT Group is paying is comparable to that of an individual with good credit who carries balances on a credit card. But, given the collateral that has been put up, the better comparison is to the interest rates that subprime credit individuals pay for loans supported by collateral, like subprime mortgages and subprime car loans. Loans with collateral to people with good credit are currently running in the 5-6% interest rate range.

CIT Group has sought government bailout money, but not gotten it.

While this is still mixed news at best for CIT Group, it is rather good news for the economy that private lenders are finding ways to avoid collapse without government assistance. This had been happening at the very beginning of the financial phase of the financial crisis (i.e. when the troubles spread from bad mortgages to the capital markets), but virtually ceased to happen when the spike in interbank lending rates hit. The panic driven spike has subsided (one month LIBOR rates were 2.46% rather than the current 0.29% a year ago), and the capital markets seem to have returned to more normal patterns as a result.

Still, this is not a recipe for long term survival. Lenders make money by borrowing at low interest rates and lending at high interest rates. The interest rates it needs to charge the small and medium sized businesses that it loans money to must be very high for the spread to make a profit for CIT. If CIT offers businesses loans at the 13%+ interest rates it can offered to offer and make a profit at, it may drive its customers into using personal credit cards to finance their businesses instead.

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