Private equity mid-market to see impact if CIT falls

The US mid-market lender, with more than $60bn of assets, has served as an important source of debt for private equity firms that operate in the mid-market.

The demise of mid-market lender CIT Group would have repercussion for the mid-market private equity world, as the lending environment would only grow tighter and more expensive.

CIT, a bank holding company with more than $60 billion in assets, is struggling for survival and appealing to the US government for help. The bank has $2.4 billion of debt due between September and December this year.

CIT was given $2.3 billion from the government’s Troubled Asset Relief Program in December, but the company continues to struggle to qualify for the Temporary Liquidity Guarantee Program, which would allow it to issue government bonds at lower costs.

Moody’s Investors Service this week downgraded CIT to just above speculative grade, and said “Moody’s believes that CIT faces significant challenges in achieving a funding profile that would provide a stable and cost effective source of funding to support its businesses. As a consequence, Moody’s believes the firm’s probability of default has increased and that the possibility that CIT will undergo significant, and potentially disruptive, organisational and ownership change has increased.”

CIT has been one of the major providers of debt to private equity firms that operate in the mid-market, along with GE Capital. One source said the two lenders consistently go up against each other for business.

According to information from data service Pitchbook, CIT Group has lent to 123 private equity-backed companies, and provided debt in support of buyouts totaling more than $10 billion. Firms that have acquired companies with the help of CIT lending include Wind Point Partners, TA Associates, Audax Group and Arlington Capital Partners, according to Pitchbook.

The loss of CIT could lead to a further tightening of the lending environment, and make debt more expensive than it already is, sources say.

“Whereas previously you could put 60, 70, 80 percent of capital structure from debt, now you can’t, now it’s running at 40 to 50 percent,” according to Brian Rich, managing partner with mid-market buyout firm Catalyst Investors. “Things get really tight if they go out, it goes to 30 to 40 percent. Prices will come down.”

With the lending environment already troubled, removing yet another lender would simply tighten things further, according to Leigh Randall, managing director with Topspin Partners.

“You would expect that void to be filled, but they’ve been around for a long time and they’re a leader in the small market,” Randall said. “It’s going to have a long-term impact.”