Here we go again.....
Sept. 30 (Bloomberg) -- CIT Group Inc., the commercial lender that has said it may be forced to file for bankruptcy, is considering an offer of financing from Citigroup Inc. and Barclays Capital, people familiar with the situation said.
The 101-year-old company’s bondholders are also seeking to provide about $2 billion in loans as a restructuring deadline approaches tomorrow, said the people, who declined to be identified because the negotiations are private. New York-based CIT may choose other options, the people said.
This would be the third time they've gone to the well this year - the previous being a $3 billion "rescue" back in July.
For those who are math-challenged this means they're running at a roughly $1 billion a month "burn rate" (to use a phrase from the old Internet Bubble); isn't "capitalism" grand?
The problem with this firm is that it shouldn't be in trouble. "Factoring", which is the primary business CIT is engaged in, is usually an insanely-profitable enterprise. So what went wrong?
Simple: They started eating the rest of the financial industry's cooking - the belief that they could branch out into various other forms of lending and ignore credit quality. This put them squarely in the same box as the rest of the banks (except that unlike BAC, C and others, they haven't been allowed to cook the books and steal from the taxpayer!)
The result was technical insolvency.
Now they're trying to stave off a full-on default and bankruptcy filing.
It is unlikely to work.
Even if they strike a deal this week there's a nasty $2.1 billion line from Citibank and Bank of America (yes, really, two banks that themselves are insolvent on a mark-to-market basis!) that has to be paid in April of next year. Where's that going to come from?
The irony of one insolvent entity borrowing from two more effectively-insolvent entities isn't lost on me. This is really no different than finding that you can't make the credit card payment so you find someone who will "roll over" your credit card balance into a new card, and "whew!" - you don't have to make a payment on the "new" line for 30 more days.
This sort of shell game is really nothing different than playing "hot potato"; legal under the rules of accounting, but a clear sign of desperation by everyone involved. The continued claims of economic improvement by the media and Washington have to be squared against the fact that debt defaults are not abating and ability to pay is not improving; indeed, we continue to see a pattern where people are simply "kicking the can" for another month or two, piling up yet more debt that they can't cover.
The back story that is not being talked about with CIT is that there's a major problem with many small and mid-sized businesses - they have fallen into the trap of "pulling forward" their financial condition.
Credit, when used to buy plant and equipment for productive purposes, can be a net positive for an enterprise. When used to finance inventory in a heavily-inventory-laden business it is more dangerous, in that the failure to meet gross margins due to a bad guess on product mix and quantity can sink you.
Factoring is more dangerous still, in that one is giving up a percentage of the gross billed ticket in exchange for "money now." When a business is driven to this sort of gimmickry it calls into question the viability of one's customers; if you have to pass the risk of slow (or no) pay customers to someone else, how viable is your company and its customer base? Remember, the reason you "factor" is that you believe that the discount on that paper is less than you'd spend on a traditional credit line - or you can't qualify for that traditional line with your bank!
How long this goes on before someone finally throws up their hands and says "no more!" is difficult to determine - but the outcome is not.
All we're arguing over is the timing.
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