Feds leave CIT clients hanging

According to this morning’s New York Times, lender CIT Group (CIT:NYSE) will not be granted access to the FDIC’s debt issuance guarantee program. This takes me by surprise, as the murmurs coming out of Washington (according to CNBC) following the weekend’s WSJ piece suggested that CIT would be able to tap into the program that allows banks to issue fixed income paper, with investors receiving a backstop from the U.S. government. This appears to be now off the table (NYT):

While CIT would be the largest American bank to fail since Lehman Brothers collapsed last fall, the company is relatively small, and few analysts say its failure would threaten the broader financial system. Nonetheless, given CIT’s historical role in financing smaller businesses, President Obama was briefed on its status Wednesday morning.

“Even though it was a large company, it was ‘small enough to fail,’ ” said David Hendler, a research analyst at CreditSights. He said the Treasury Department’s message was clear: firms not vital to the inner workings of the financial system “will probably be shut out” of the government’s rescue efforts.

“We have a comprehensive and aggressive strategy to restore stability to the financial system,” the Treasury said in a statement. “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies.”

Despite what we all might think, the U.S. banking system isn’t entirely cured of its ails. Just yesterday, for example, one U.S.-based borrower complained that its cheques were being bounced even though it was onside every covenant and had received no communication from its midsized financial institution that something was awry. One of those cheques was an automatic transfer to cover payroll, and the companies financial backers were left to scramble to inject more capital to make good on the employee payments.

Suspicions are that the lender didn’t have enough capital to maintain all of its the drawn revolvers across its portfolio, and rather than go through with the hassle of “demanding” each loan, it jumped that step and partially repaid itself using the borrowers’ existing cash on hand.

If you manage a growing business in the SME universe and would like to test the financing market, please give us a call at Wellington Financial (Amy is the place to start at 416-682-6002; if you can’t reach her, I’m Mark McQueen at 416-682-6000). Our capital comes from Canadian pension funds, life insurance companies and a AAA-rated Crown Corporation owned by the Canadian government; and we don’t use additional warehouse lines to lever our loan portfolio. Every loan facility and operating line we provide is 100% backed by equity, unlike other lenders who are levered anywhere from 3x to 24x their equity base.

Wellington Financial LP is a privately held specialty finance firm providing operating lines of credit from $1 million to $5 million; term and amortizing loans up to $40 million; and venture debt loans up to $10 million. Wellington Financial LP is currently deploying a $450 million investment program via its third fund. The fund’s clients vary in size and business model, but generally have current year revenue in excess of $5 million.

Hopefully, the U.S. Treasury Secretary will fix the CIT challenge over the next couple of days; once you save Bear Stearns, you’re preggers. One million SME clients shouldn’t be thrown to the wind; leaving aside the esoteric issue of whether CIT fits the “too big to fail” definition or not.

In the meantime, if you are a CFO and worried about where the overall loan market is going, give us a call. We have half of our capital base currently loaned to clients, which leaves plenty for other good companies to access.

MRM