CIT rescue may be win for bondholders behind lifeline

NEW YORK (Reuters) - Big bondholders, expected to provide a $3 billion lifeline to CIT Group, may be the winners in the embattled U.S. lender's latest rescue plan, though it may only delay a bankruptcy filing, analysts said on Monday.

A group of large bondholders including Pacific Investment Management Co (Pimco) agreed late on Sunday to provide the rescue financing to give CIT more time to restructure its debt, sources have said.

CIT is expected to pay a 10.5 percent interest rate for the rescue loan which is yet to be confirmed by the company.

The loan would be a windfall for the bondholders providing the financing but may be an exorbitant cost for the company, and probably more than it charges its own borrowers, said business attorney Jerry Reisman, a partner with Garden City, New York law firm Reisman, Peirez and Reisman.

"This is only an interim financing" and will merely delay a bankruptcy filing as CIT loses business and its loan defaults continue to grow, he said.

Bondholders providing the rescue financing will not only get a good return, but will have their loan secured by some of CIT's best assets, he said.

On Sunday, a source familiar with the matter told Reuters that the $3 billion rescue financing will be backed by CIT's remaining unsecuritized assets which likely exceed $10 billion.

CIT spokesman Curt Ritter declined to comment after initial reports of the rescue. He could not be reached for comment on Monday.

SHORT-DATED DEBT SURGES

In addition to Pimco, other bondholders involved in the rescue include Oaktree Capital, Silver Point Capital and Centerbridge Partners, Capital Research & Management and Baupost Group, according to the Wall Street Journal.

Part of the $3 billion rescue loan will apparently be used to pay off short-dated debt, including a $1 billion floating rate note due in August, analysts said.

Pimco is listed as the largest holder of those CIT floating-rate notes as of the end of March, according to the latest regulatory filings. Mark Porterfield, spokesman for Pimco, declined to comment.

The price of CIT's floating rate notes due in August surged on Monday to 88 cents on the dollar, up about 17.5 cents on the day, according to MarketAxess.

Its 5.2 percent notes due in 2015 fell by two cents to 66 cents on the dollar, while its 5.4 percent notes due in 2013 were unchanged at 53.5 cents on the dollar.

While a win for short-dated bondholders, "for intermediate and long-dated bondholders, we believe the support may prove to be costly to recovery prospects," CreditSights analysts Adam Steer and David Hendler said in a report on Monday.

The rescue layers in more debt ahead of the rights of long-term bondholders and also fails to fix CIT's underlying problem, lack of a viable funding model, the CreditSights analysts said.

"We believe CIT may still be at risk of filing for bankruptcy even after receiving emergency financing," they said.

BRIDGE TO NOWHERE

Tom Sowanick, chief investment officer at Clearbrook Partners in Princeton, New Jersey, said the deal is a likely win for bondholders with debt due in three years or less, while prospects for recovery subside for debt maturing after that.

"The $3 billion new loan could act like a bridge to a series of debt-exchange offers," he said. "I see it as a bridge to nowhere."

CIT may still need to raise $4.6 billion to $7.6 billion of capital to meet Federal Reserve requirements mandated when it converted into a bank holding company, CreditSights said.

To raise that amount of capital, CIT will likely pursue a "coercive" debt exchange, it said.

CIT's shares surged by 83 percent, or 58 cents to $1.28 on Monday.

"The stock holders are cheering because (the rescue) is better than a bankruptcy and the thought is maybe the markets will improve over the next couple of years," said Sean Egan, managing director at Egan-Jones Ratings Co. in Haverford, Pennsylvania.

Even with $3 billion in additional cash, however, fundamental problems will remain since CIT's cost of funds is greater than its net return on assets, he said in a report. The best long-term answer is a combination with a bank or another source of capital at a reasonable price, Egan said.

(Reporting by Dena Aubin and Jennifer Ablan)