CIT announces survival plan. But are lenders out of the woods yet?

CIT, a lender to small and mid-size businesses, launches a restructuring plan to avoid bankruptcy. The bid comes as the credit markets are still dealing with a tide of bad loans.

By , Staff writer

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    People walk past the CIT offices in New York Friday. Shares of CIT fell 40 percent Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. The company's debt prices fell too and the cost of protecting its debt against default rose.
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By announcing a survival plan Friday, the major lender CIT Group also sent a wider message: The US bank crisis isn't over yet.

America's credit woes may not be panicking the overall stock market anymore, but the system still has a lot of trouble to work through.

CIT isn't a household name, but the banking firm is an important lender to small and mid-size businesses – firms that often bear the brunt of tighter credit when banks face hard times.

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The firm announced a restructuring plan designed to avoid bankruptcy by having its creditors agree to a debt-for-equity swap. This would lighten CIT's debt burden. Bondholders would take losses on their debt holdings but would end up with new shares of preferred stock in CIT.

A steering committee of CIT's bondholders has approved the plan, but CIT wants to win approval of a wider pool of creditors – enough to remove $5.7 billion in debt – by Oct. 29.

The survival bid comes as the credit markets are still dealing with a tide of bad loans. Also, lending firms are trying to win back the confidence of investors who provide needed backing for their operations.

In some ways, the word "crisis" no longer fits the times. Concern about the outright failure of the very biggest banks has receded – and many of them are moving to pay back government rescue money provided by the Troubled Asset Relief Program (TARP) last fall.

But in other ways, the crisis label still applies. The Federal Reserve and Treasury are still propping up the system on many fronts. (CIT has $2.3 billion in TARP funds.) Failures of smaller banks continue, real estate loans are still going bad, and rising unemployment puts more borrowers at risk of default.

The ongoing struggle at banks means that many Americans have reduced access to credit. Some signs of the challenge:

• Credit-card companies reduced the borrowing limits for an estimated 58 million cardholders during a 12-month period ending in April, according to an Associated Press report that cites data from FICO, the credit-score company. The card limits were reduced even for people with strong credit scores.

• Banks are still tightening their lending terms for businesses and consumers on other types of loans, although the pace of tightening has eased, according to the Federal Reserve's summer survey of loan officers.

Demand for loans has also fallen, softening the impact of tighter credit. That trend, seen by the Fed and found in other surveys, is typical in recessions.

Yet the economic recovery will depend on banks being ready to lend when businesses are ready to expand.

If the CIT restructuring plan doesn't work, the company warned, it may end up in bankruptcy. It outlined a plan for a "prepackaged" court restructuring.

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For background on the challenges facing CIT, click here.

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