by Calculated Risk on 7/19/2009 09:11:00 PM

UPDATE, Deal Approved by Board: From the NY Times CIT Is Said to Obtain Urgent Loan to Prevent Bankruptcy (ht Basel Too)

Directors of the CIT Group, one of the nation’s leading lenders to small and midsize businesses, approved a deal Sunday evening with some of the bank’s major bondholders to help it avert a bankruptcy filing through a $3 billion emergency loan ...

From Reuters: CIT bondholder plan backed by unsecuritized assets (ht jb)

"The $3 billion is new money but securitized by all the remaining unsecuritized assets which probably exceed $10 billion," the source said.

A few points:

This is new debt at a reported 10% plus LIBOR rate. This is not debt for equity. This is essentially a bridge loan, with a reported 2 1/2 year term.

This deal hasn't has received CIT Board approval (UPDATE Above: Deal Approved).

This new debt is apparently secured by all the remaining unsecured assets of CIT. This probably means CIT will survive through 2009 (if approved), but long term debt holders will be behind this debt.

The parties are trying to negotiate a debt-for-equity swap, and that would probably seriously dilute current shareholders.

This doesn't solve the problem, just kicks the can down the road.

Other story links:
WSJ broke the story: Bondholders Plan CIT Rescue

NY Times: CIT Is Near Deal for $3 Billion Loan to Avert Bankruptcy

by Calculated Risk on 7/19/2009 05:52:00 PM

From the WSJ: CIT cuts deal with key bondholders for $3 billion in financing. CIT will avoid bankruptcy, restructure outside court. (ht Noah at UrbanDigs in NY)

UPDATE: From WSJ: Bondholders Plan CIT Rescue

The deal, which was being considered by CIT's board Sunday night, charges CIT very high interest rates, and it doesn't permanently fix the company's long-term financing needs ... Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. ... CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.

The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.

So it is a bridge loan while CIT tries for a debt-for-equity exchange or new debt. This is a short term fix, but probably gets CIT through the year.

by Calculated Risk on 7/19/2009 03:10:00 PM

From the Sacramento Business Journal: Office vacancies piling up (ht Brad)

Office vacancies in Sacramento continue to rise as new buildings come online while many businesses are retrenching or closing altogether.

During the second quarter, local office vacancy surged to [a record] 20.9 percent ...

Brokers say these lowlights reflect the clash between today’s economic uncertainty and the confidence of the past, as large new buildings planned years ago are being completed just as companies hit by the recession are hunkering down, getting leaner or closing down.

While conditions would appear dreary even without new construction, the completion of major office projects is compounding the problem.

“You’ve got very significant new buildings being added to the base,” said Cornish & Carey managing partner John Frisch ...

Companies are "hunkering down, getting leaner or closing down" and giving up office (negative absorption) just as long planned new space comes online. This is pushing up vacancy rates, and pushing down rents. The article mentions suburban Class B office lease rates are back to levels last seen in the 1980s.

I posted the following nationwide graph a few months ago based on CoStar's The State of the Commercial Real Estate Industry: 2008 Review/2009 Outlook (no link). This shows that 2009 will be the peak office space delivery year for this cycle.

Click on graph for larger image in new window.

This graph graph shows the amount of office space delivered per year in the U.S. in millions of square feet since 1958. The over investment during the '80s (S&L crisis) is obvious, as is the office boom during the stock bubble.

The red columns are based on projections from Costar for projects already in the pipeline. Although deliveries will be strong in 2009 (with all the projects currently under construction), CoStar projects new office deliveries in 2010 will the lowest since 1996, and deliveries in 2011 will be the lowest in over 50 years.

by Calculated Risk on 7/19/2009 12:19:00 PM

The FDIC closed four more banks on Friday, and the following graph shows bank failures by week for 2009.

Click on graph for larger image in new window.

So far there have been 57 FDIC bank failures in 2009.

It appears there will be close to 100 bank failures this year.

Note: Week 1 ends Jan 9th.

This is nothing compared to the S&L crisis. There were 28 weeks during the S&L crisis when regulators closed 10 or more banks, and the peak was April 20, 1989 with 60 bank closures (there were 7 separate weeks with more than 30 closures in the late '80s and early '90s).

The second graph covers the entire FDIC period (annually since 1934).

Back in the '80s, there was some minor multiple counting ... as an example, when First City of Texas failed on Oct 30, 1992 there were 18 different banks closed by the FDIC. This multiple counting was minor, and there were far more bank failures in the late '80s and early '90s than this year.

The third graph includes the 1920s and shows that failures during the S&L crisis were far less than during the '20s and early '30s (before the FDIC was enacted).

Note how small the S&L crisis appears on this graph with the change in they-axis! The number of bank failures soared to 4000 (estimated) in 1933.

During the Roaring '20s, 500 bank failures per year was common - even with a booming economy - with depositors typically losing 30% to 40% of their bank deposits in the failed institutions. No wonder even the rumor of a problem caused a run on the bank!

Of course the number of banks isn't the only measure. Many banks today have more branches, and far more assets and deposits.

The FDIC era source data is here - including by assets (in most cases) - under Failures and Assistance Transactions

The pre-FDIC data is here.

by Calculated Risk on 7/19/2009 09:31:00 AM

Not much news on CIT ...

From Bloomberg: CIT Group’s Banks Said to Weigh Bankruptcy Financing

CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said.
...
“This thing doesn’t have a future,” CreditSights analyst David Hendler said yesterday in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,”

From Bloomberg: Alabama Hardware Distributor Blames CIT Woes for Its Bankruptcy

A hardware distributor in Alabama became the first company to blame the troubles of commercial lender CIT Group Inc. for its bankruptcy yesterday when it filed for protection from creditors.

From WSJ Real Time Economics: CIT’s Customers Issue an Urgent Request

Thirty-two trade groups, in an unusual display of unity, pleaded in a letter on Friday night for the Obama administration to reverse its decision and extend aid to the beleaguered small-business lender CIT Group Inc ...

From the letter:

Dear Secretary Geithner:

As the U.S. and world economies struggle to recover from the most devastating recession in recent memory, we are writing to impress upon you the very severe ramifications that a CIT bankruptcy would have on more than one million small- and medium-sized businesses, their partners in the U.S. retail industry and the manufacturers and service providers that supply that sector. Our organizations represent thousands of these small- and medium-sized enterprises and their suppliers as well as the most significant retail operations in this country. We urge the government to reconsider every possible option to address the current stresses confronting CIT and to prevent further tightening of the credit markets.

... Without CIT, thousands of retailers may be forced out of business because their suppliers will be put out of business. Such a ripple effect could set back the recovery of the manufacturing and retail sectors, and therefore the U.S. economy, by several years. CIT is one of the leading factoring companies in the United States and is a vital source of financing for manufacturers as well as the small and medium-sized vendors who are the primary suppliers of merchandise sold in U.S. retail establishments. Because of CIT’s primacy in this field, they have essentially become the banker to “Main Street”, and as such, it is absolutely essential for the government to utilize every tool at its disposal to prevent a CIT bankruptcy.

Uncertainties over CIT have already provoked a credit squeeze that threatens payments and payrolls in thousands of businesses. As this uncertainty persists, and if CIT is forced to undertake a bankruptcy filing, the ripple effect will be felt in every city and state across this country as the further tightening of credit markets will make it incredibly difficult, if not impossible, for many of the companies who currently rely on CIT for financing to remain in business. The number of jobs that depend on the successful outcome of the CIT crisis is immeasurable.