Storm Clouds - First Bolt of Lightning

From time to time, I like to jump in and comment on the current lending environment facing commercial businesses and real estate investors. Today's entry, hopefully isn't a harbinger of things to come.

I know that several other large private lenders have closed up shop however, most of those closures stemmed from these lender's exposure to the residential market and not due to commercial. Well, we have our first potential casualty from a pure play commercial lender.

CIT Group yesterday drew down 100% on its $7.3 billion back up credit facility to meet current cash flow needs, and cash to service debt in the near term. CIT has to refinance approximately $3.0 billion in short term debt in 2008.

The reason for CIT's troubles stem from the disruption in the commercial paper market - which is almost non existent for lenders. Without access to the commercial paper market, CIT has to rely on other sources of funds, such as commercial deposits and other deposits. CIT's lack of a substantial deposit base created a liquidity crisis.

CIT management stated that the Company has the liquidity to fund its operations in 2008, but commented that it has to reduce its lending to new customers to preserve capital. This might be a sign of relief for CIT's current business customers, but it reduces the total amount of capital available to all commercial business and real estate investors.

The issue with the commercial paper market are intertwined with the general lack of investor confidence in the assets (loans) supporting these obligations. It started in the residential mortgage market, and know has swept into the commercial debt market.

The Fed and Wall Street hope that the recent liquidity added to the market will prime the pump to allow investors and lenders to create a floor in the value of these assets supporting the obligations. A floor, created by good old buying and selling (trading) that is the foundation of our market system, will signal to all parties that we reached the bottom of the residential and now commercial debt market leaving only upward pressure on asset values. Upward movement in asset values with increase the acceptance and ability of investors to buy lender ogligations. Let's hope they are right. If not, the storm could turn into a hurricane.