CIT has paid a heavy price for a reprieve. A $3bn loan facility, signed off on Monday evening, lets the desperate US small business lender avoid a quick trip to the bankruptcy courts. But the rescuers have extracted tough terms from this desperate borrower. And survival is far from certain.

The new facility is backed by nearly all the firm's remaining unsecured assets, supposedly worth three times as much as the loan. It also comes with an interest rate 10 percentage points above Libor, according to news reports. That's not a bad deal for the lenders, a group that includes Centerbridge, Pimco and Oaktree Capital.

The lenders must also be hoping that by keeping CIT alive, they are increasing the value of existing loans. The new facility gives CIT enough cash to repay $1bn of debt due in August via a tender offer. Moreover, the company will have a cash buffer against nervous customers drawing down their agreed lines of credit. And it will have more time to run down loans, putting less pressure on CIT's customers and thereby potentially increasing recoveries, even if the lender eventually has to close up shop.

There is also the slight chance that CIT might survive and repay all of its outstanding debt. This last is the best reason for CIT's board to agree to such punitive terms - actual bankruptcy financing might be cheaper.

The firm lives on in hope. While the new $3bn probably isn't enough to prevent another cash-crunch next year, credit markets have been thawing. They just might warm enough for CIT to refinance its debt at manageable rates.

Then there is the government. Perhaps the Federal Reserve will allow the firm to transfer more assets to its small bank, which could then get funding at a reasonable cost from the central bank's discount window. Or maybe the Federal Deposit Insurance Corporation will change its mind and back CIT's debt, allowing it to borrow cheaply.

All of these seem unlikely - and they wouldn't address the problem of big operating losses. But CIT has kept the possibilities alive - at a high cost.

By Robert Cyran.

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