Run Away! Run Away!

There is some measured optimism among bondholders of CIT. The firm is in talks with the government to arrange an aid package. While this may be good for CIT in the near term, it is not a long-term fix. Also, government aid could be painful to bondholders.

The FDIC is reluctant to give CIT the go ahead to issue FDIC-backed TLGP bonds. This is with good reason. CIT needs to refinance approximatelty $10 billion of debt by year end. FDIC chief Sheila Bair does not want to be on the hook for billions of dollars of CIT bonds believing that CIT's business model is broken. She is not incorrect.


CIT lends to small and often, less creditworthy businesses. When CIT was able to access cheap capital, the high rates it charged many of its small and mid-sized corporate borrowers earned it a handsome profit. However, rising delinquencies and higher borrowing costs have broken CIT's business model. With investors shunning the securitization markets and few investors interested in investing in loans given to risky companies, there is a good chance that CIT is not long-term viable.

Because CIT may have difficulty surviving, to reduce it's exposure and to not let investors off the hook, the government could coerce bondholders, especially of short-term bonds, exchange their bonds for equity or longer-term debt to alleviate CIT's need to refinance during the next several months. What to do? I do not think that CIT is viable as an independent lender and now bank is able to (or is crazy enough to) buy the firm. A independent lender to risky borrowers is not a good place for one's fixed income assets. Just get out.