CIT may be saved - but now what?

CIT shares jumped 80% Monday but have lost $6.5 billion in value since Jeffrey Peek took over.

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NEW YORK (Fortune) -- Bondholders are throwing CIT a lifeline. But salvaging the small business lender could still test the company and its CEO, Jeffrey Peek.

CIT Group (CIT, Fortune 500), the New York-based lender that came up short last week in its bid for a second federal bailout, lined up some expensive new financing Monday evening from a group of creditors.

The arrangement allows CIT to avoid what would have been the fifth-biggest U.S. bankruptcy filing, according to BankruptcyData.com, and continue operating as it prepares to restructure its debt.

The deal represents a reprieve for CIT's customers, many of whom would have had trouble lining up new credit in the event of a Chapter 11 filing. News of the financing agreement also briefly provided a big lift for CIT shareholders.

CIT's stock bounced 80% Monday to about $1.25. But that's still well below the stock's peak of about $60 from just a few years ago. And on Tuesday, shares tumbled back to around $1 amid questions about how long the rescue plan can keep CIT afloat.

Analysts at fixed-income research firm CreditSights wrote Monday that a financing deal "does not fix the underlying problem" -- which is that CIT has yet to find an alternative to borrowing in risk-averse credit markets to fund its loans to small and midsize businesses.

"Depending on the capital markets for funding is problematic, to say the least," said James Angel, a finance professor at Georgetown University in Washington. "This deal gives them breathing room, but their options are not a pretty picture."

That's putting it mildly. CIT said in a filing with regulators Tuesday that it will pay 13% annual interest for the $3 billion loan -- $2 billion of which is available now and $1 billion of which is expected to be paid by next Friday.

News reports had CIT paying 10% above Libor, an overnight bank lending rate that recently was around 0.5%. But the deal includes a 3% Libor floor, CIT said in its filing Tuesday, meaning the firm won't benefit from the low level of that rate recently.

What's more, the loan will be secured by "substantially all unencumbered assets" of CIT. So the firm is left with few options should it need more loans in the future.

CIT also said it expects to post a $1.5 billion second-quarter loss when it files its quarterly report with regulators, due next month. The company said it will set aside $500 million for credit losses in the quarter. CIT had been slated to report earnings Thursday, but called that announcement off last night when it confirmed its emergency funding plans.

Meanwhile, CIT warned that it could yet be forced to file for Chapter 11 bankruptcy protection should it fail to persuade holders of $1 billion of floating-rate notes coming due next month to swap their debt for 80 to 83 cents worth of new bonds, depending on when they act.

The comment reflects the enormous stresses building on CIT as it struggles to raise new funds -- though analysts said there could also be an element of brinksmanship in the firm's stance.

"We question how many bondholders will tender at this significant discount to par considering the bonds come due in less than a month," Bank of Montreal analyst David J. Chiaverini wrote in a note to clients Tuesday. "However, CIT may coerce bondholders to tender their notes by threatening bankruptcy."

Even should CIT succeed with the first stage of its restructuring, the firm remains vulnerable to another downdraft in the economy. The proportion of loans past due has jumped over the past year, and if unemployment continues to soar even a restructured CIT may have trouble making ends meet.

"It's encouraging that bondholders are willing to make this deal work," said David Ely, a finance professor at San Diego State. "But CIT is certainly still at risk if the economy doesn't improve."

For now, the job of reviving CIT falls to Peek, who has been the company's leader for five years.

He has sought to expand CIT beyond its traditional asset-based lending roots and into less economically sensitive businesses. But the collapse of the credit markets in 2007 has crushed the company's stock. CIT has lost $6.5 billion of market value since Peek took over as CEO in July 2004.

Peek has been well compensated for his time though. He has received $36 million in salary, bonus and other compensation since 2004, according to Securities and Exchange Commission filings.

Last year he made $5.4 million, including $800,000 in salary, $3.2 million in stock and option awards and $212,682 in personal use of company cars and planes.

Though the stock's performance hardly matches up with Peek's sweet pay, CIT's lenders have enough to worry about without taking on a rushed executive suite shakeup, Angel said.

"Any change in management could end up further damaging asset values," Angel noted.

It would also be costly for the company to cut ties with Peek. CIT could owe him as much as $14.7 million were his employment to be terminated, according to filings.