If CIT Goes Down, These Companies May Be Hurting
UPDATE: CIT has said it will not receive a bailout from the government. The company is “evaluating alternatives.”
After trading on CIT was halted today, we have been on the edge of our seats waiting to hear whether the troubled lender will get a federal bailout. The debate over whether CIT is big enough to deserve a bailout or whether it’s too far gone to be saved continues to rage, but rather than weigh in there, we decided to look at who will be affected by a collapse of the liquidity-starved lender.
Buyouts Senior Editor Ari Nathanson and I compiled a list of buyout-backed companies which have used CIT as a lead arranger on its credit facility over the last three years, courtesy of Thomson Reuters data.
We came up with 38 companies.* Of those 38, CIT provided a revolver loan to all but two. For companies that haven’t drawn down their revolver (including this week’s run, which has only added to the company’s demise), the sudden disappearance of CIT could mean the sudden disappearance of all liquidity.
The interesting part is the amount of repeat business on the list. It brings new meaning to the “strong lender relationships” often touted by buyout pros. The one thing they don’t brag about is how a “strong relationship” with a failing lender could wind up being worse than no relationships!
For example, Wind Point Partners used CIT for four of its portfolio companies. Thoma Cressey Equity Partners (before Carl Thoma and Brian Cressy split up) also has four CIT-led credit facilities in its portfolio. Sentinel Capital Partners and Baird Capital Partners each have two companies with CIT facilities.
Update: As requested, we ran the data without the “lead arranger” parameter and found that CIT has provided debt in some capacity to 133 companies over the same period (the past three years). Here is the list.
View the entire list of lead arranger deals below.
LBO-Backed Companies With CIT As Lead Arranger
*We eliminated a few that have since been sold, but haven’t checked that each of the 38 are still owned by their listed PE backer.
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Charles T said on July 16, 2009
The real point is that CIT haven’t been making loans for almost 18 months now, and that’s why the Feds are saying “Go pound sand… The system doesn’t need you…”
What CIT IS doing is seeding the market with their PR machine, letting every media outlet in the country know how indispensable they are, loans they provide,etc… BS. Small Business America has been facing more severe liquidity constraints than larger corporations. JPM, and certain smaller community banks, have stepped into the breach.
It’s a bold statement, but CIT doesn’t matter anymore. Let’em go into run-off mode.
Johnny Keynes said on July 16, 2009
The other thing that is not reflected in this list is the number of credits where CIT is not the lead arranger but is still a significant participant in the bank group. That’s the list you should really be looking at. The “lead arranger” title can be taken over by any of the participant banks. If you want to get a more accurate picture of the liquidity problems this will cause, look at the total number of LBO loans they are in. CIT built a big business in this space in a short period and I imagine a lot of buyout shops are panicking right now. Not to mention the other lenders in any bank group that CIT was in where draws on the revolver have been fast and furious.
PEHub Administrator said on July 16, 2009
Johnny – I will check to see if we can pull a list like that. Certainly the scale of CIT’s business is nothing to sneeze at. The reason I narrowed it to lead arranger is because most of the buyout pros I spoke with said they weren’t worried about companies where CIT held a small bit of their companies’ capital structures, but were worried about companies where CIT was the lead arranger. Then again, they could have been bluffing. -Erin
Mid Mkt Lender said on July 16, 2009
In response to Charles T:
I think it is imperative to check the facts before you offer opinions. First and foremost, CIT is one of the pre-eminent lenders across various sub-segments of the banking industry. Specifically, the middle market sponsored finance market where I work and where CIT is one of our primary competitors / partners in deals and a valued one at that.
Since the beginning of the year they played a role in more than 25 deals in my space which doesn’t account for equipment finance, factoring, and small business lending. Support has come in the form of refi’s, DIP’s and new issuances within asset based and cash flow lending; you might recognize some of the names; Sunguard, Eastman Kodak, Toys R Us, Eddie Bauer, Sears, as well as numerous others with less recognizable names.
Here is the truth, from where I sit, they are indispensable as they provide real liquidity to SME’s that are at the forefront of restarting the retail engines of this economy. Moreover, they provide financing to businesses that either JPM are not interested in or smaller regional banks don’t have the credit appetite to support. They also provide a valuable financing partner providing much needed liquidity into segments that require expertise that a majority of regional banks don’t have. By allowing them to fail not only are you creating a vacuum for the likes of GECC to become to big to fail but also a monopoly in certain segments of the banking community.
Unfortunately, this will be another Lehman (not on that scale) whereby hindsight is it was a mistake to let these guys fail. Guess CIT’s executives haven’t been as charitable or fortunate as Goldman’s whose employees stand at the precipice of receiving record bonuses. Its not like this is AIG who received $170 billion of taxpayer bailout money of which $13 billion went to Goldman, at par nonetheless. But hey who needs CIT….
bob said on July 16, 2009
It sounds like CIT is the subprime lender for business when will people realize that maybe credit should be a little more difficult to obtain than has been. Looking at some the names Mid Mkt Lender listed as customers of CIT, some shouldn’t have gotten any financing at all.
Charles T said on July 16, 2009
In response Mid Mkt Lndr:
Yes, I have facts, plenty of groups who have gone elsewhere due to CIT being shutdown for the past year or so. I am talking smaller enterprise, not mid-market, who quite frankly have a greater menu of options than small business America.
I was hoping you were going to offer numbers. I have seen the numbers from the CIT Ks and Qs which illustrate year/year numbers, and they don’t support the proposition that CIT is a growing supplier of credit to US, and global, enterprises. Or, perform a Lexis Nexis search and see the anecdotal evidence.
Yes, who needs CIT…except for J Peek, who handcuffed the executive comp committee to help.
The party hurt here are the CIT stakeholders – employees, vendors, and enterprises seeking financing.
Amanda Potashner said on July 16, 2009
If CIT disappears many businesses will be affected. Its demise will leave many companies without access to their unfunded credit facilities and quick access to working capital. Without access to immediate cash flow many businesses will be forced into failure. How can they be prepared? Many companies have turned to The Receivables Exchange to regain that liquidity source. Small and mid-market companies are able to sell their receivables through auction to a global network of institutional lenders who bid against each other purchase their receivables. These Sellers are able to tap billions in liquidity in as little as 24 hours. If anything the CIT news has taught many that relying on one large firm to source liquidity leaves your business’s viability unprotected should that company go under.
Mid Mkt Lender said on July 17, 2009
Bob please help me understand which one of these guys shouldn’t have received credit and why.
Based on your rationale, which clearly doesn’t take credit 101 into consideration relative to liquidation values and so forth you rather deny some of these businesses access to credit whereby they cannot finance daily operations. Ultimately denying them access to liquidity during the working capital conversion process would lead to their demise and bankruptcy. So on the retail front alone we have businesses who maintain commercial leases that cover more than 5,100 properties (3,900 Sears-Kmart/ 847 Toys / 370-EB) in virtually all of the 363 MSA’s in the U.S. primarily as well as maintain appx 400,000 employees (324k – Sears/ 72k-Toys/10k –EB). Hope you don’t own any REITS, if so you better start working on your hedging strategy.
While I do agree with you that credit should be difficult to obtain we aren’t talking about retail consumers obtaining credit cards or subprime home loans here. Trust me obtaining commercial credit in this market is no cakewalk / rubberstamp process and if you don’t believe me ask the executives at any of these companies how difficult the reporting requirements and management of the intricacies of the credit agreements are they have entered into to obtain credit from guys like CIT are. I have clearly oversimplified the process and links between access to credit and bankruptcy here however lenders aren’t blindly throwing money at these institutions.
Henry Buttal said on July 17, 2009
Charles T,
I think Mid Mkt Lndr has assessed this better. From my experience as a small and medium CFO, and as President and CEO, Bank Of America and Chase have never been overly eager to address liquidity issues for SMBs (unless, of course, SBA is backing the loan, or you have provided one of your offspring as security). Wells Fargo was probably the best, but at the time they were not covering enough of the country. Furthermore, big banks have never been as aggessive in courting the SMB business as CIT.
Bankruptcy will obviously be a negative to share and debt holders, and those who depend on CIT for credit lines. LIQUIDATION, if it occurs, will be a much bigger, and longer term problem for the SMB and mid markets, because you will remove a significant amount of credit infrastructure that won’t be easily replaced.
Mid Mkt Lender said on July 17, 2009
Charles T –
As it relates to Small business lending you are correct CIT has pulled back so too has the small business lending universe in general though.
For good market facts see article:
http://money.cnn.com/2009/07/02/smallbusiness/sba_small_business_lending_falls.smb/index.htm
Unfortunately for CIT and its customers their wholesale funding model was contingent on securitization markets which ceased to function properly and are still dysfunctional. Even after the Feb 2009 TALF program which included SBA support mechanics. Bottom line, CIT is not lending much to the SME market but who is and I guarantee you the regional banks as well as the bulge bracket banks don’t have the expertise or appetite to fill the void if CIT no longer exists.
Management has been forced to strategically allocate capital. What prudent lender with limited capital and an impaired funding model would engage in providing much capital for SBA type of loans in this credit cycle? These loans traditionally carry higher risk due to business failures and limited equity backing and cannot be recycled. While I acknowledge the SBA programs maintain guarantee programs CIT management has in my opinion upheld its fiduciary responsibilities to stakeholders by focusing on better risk weighted asset classes with higher yields, lower volatility and deeper pocketed owners which is why I defend their practices of rolling into higher priced refis – see below – as well as continued investment in middle market assets.
•Sears (BB+) – refi of ABL facility – accretive to CIT earnings base up on repricing
•Sunguard (B-) – refi of A/R facility – accretive to CIT earnings, tighter credit restrictions
•Eastman Kodak (CCC+) – refi of ABL facility – accretive to CIT earnings and tighter credit restrictions
•Toys R Us (BB-) – refi of ABL facility – accretive to earnings
•Eddie Bauer – DIP revolving facility tied to tangible current asset coverage. Company has agreed to be bought by Golden Gate Capital who will operate as a going concern.
On the aggregate they are not growing suppliers of loans but what financial institution is in this credit cycle. There are simply very few good credit opportunities to lend to moreover what perspective asset owner would sell their business into this environment of depressed valuations. As a participant in the middle market space they are considered one of the top 5 lenders who routinely bid on new assets and are putting dollars to work. It would be sad to see them exit.
In light of my middle market tilt with limited field level exposure to the SBA worlds sentiment I find it trivial anyone would want to see the #1 SBA lender for most of the past decade becoming insolvent. I genuinely don’t think the gov’t isn’t putting this CIT event in proper perspective. In fact, what we are seeing now is deals CIT is in are causing companies to unnecessarily draw down on RCF’s further impairing market liquidity.
no deposit home loans said on July 21, 2009
Which is that sinking ship? Is it Titanic?