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By | Timothy Prickett Morgan 20th July 2009 15:20

Dell partner CIT dodges bankruptcy

Replaced by Red Hat in the S&P 500 just the same

Financial services giant CIT Group, which dabbled just a bit too much in subprime mortgages, is on the verge of getting some $3bn in emergency financing from its bondholders in order to avert bankruptcy, according to Reuters.

There are two IT angles to this story. Firstly, CIT is a long-time partner of PC and server maker Dell, providing some of the backing on the leasing and financing deals that Dell does to peddle its iron. CIT sold off its 30 per cent stake in Dell Financial Services to Dell at the end of 2007 for $306m, making Dell the sole owner of the unit. CIT does still do some deals backing Dell leasing and financing, however.

Last week, at Dell's financial analyst day, company chief financial officer Brian Gladden said that CIT owes Dell $35m right now. He added that CIT typically does around $100m in financing per quarter for US Dell customers, plus some other financing in six other countries that were not identified.

CIT, like Goldman Sachs, converted itself to a bank holding company late last year, thereby in theory making it available for funds from the U.S. government's Troubled Asset Relief Program. There is apparently $2.33bn in cash designated to be pumped into CIT if it cleans up its books.

The $3bn in financing aims to do that, which in turn increases the odds that Dell customers can still get leases and financing through CIT - profitable leasing deals that CIT needs (among other things) to stay afloat, and that Dell needs to keep financing equipment and to spread out its risks in this down economy. CIT has $1.1bn in debt that becomes due in August and another $2.5bn at year's end, and has racked up $3.3bn in losses in the past six quarters.

The second IT angle on the CIT financial mess is that Standard & Poors will remove CIT Group from its index of 500 companies on July 24 and replace it with commercial Linux distributor Red Hat. CIT's plummeting stock price has put pressure on the S&P 500 index - the stock hit a year low of 31 cents per share last Friday, but has rebounded to $1.36 this morning on the news. But this is still well off the $13 per share it was trading at last September, when the economic slowdown started to kick in.

Red Hat should help stabilize it a bit, but is a much smaller company, even if it is in an inherently less risky business. Red Hat's shares hit a low of $7.50 last November, but are now at $22.28 a pop and climbed 9.1 per cent on the news last Friday that the company would be added to the S&P 500 index. ®

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