CIT looks for lenders in the face of bankruptcy
CIT Group Inc., the 101-year-old commercial finance company facing bankruptcy after failing to receive federal guarantees for its bonds, said it’s in talks with potential lenders to secure funding.
The company, which finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc., is “continuing to evaluate alternatives,” New York-based CIT said yesterday in a statement. Earlier, bondholders held calls to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation.
CIT is running short of cash, and may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. CIT, which has reported $3 billion of losses in the last eight quarters, received $2.33 billion in funds from the U.S. Treasury in December and hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program.
“They are going try to raise capital with any unencumbered assets and maybe they will get a couple of billion dollars, but that’s not going to solve the problem,” Sean Egan, president of Egan-Jones Ratings Co., said in a Bloomberg Television interview. “What they really need to focus on is the fact their operating income is a lot less than their cost of funds so there’s going to have to be a restructuring.”
Pimco Call
Pacific Investment Management Co., CIT’s largest bondholder according to regulatory filings, was to host a call, and debt owners are considering hiring financial and legal advisers, said the person, who declined to be named because the discussions are private. The company hasn’t proposed an exchange offer.
“CIT indicated that it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file,” CreditSights analysts Adam Steer, David Hendler and Pri De Silva wrote in a report yesterday. “We believe the figure is in the range of $4 to $6 billion plus, making outside capital sources shy away.”
Steven Vames, a spokesman for Newport Beach, California- based Pimco, declined to comment.
CIT said in the statement it’s continuing to serve customers. CIT spokesman Curt Ritter didn’t respond to a message.
If bondholders are able to swap as much as $6 billion, that may reopen talks with the U.S. government for a bailout package, Jeffrey Werbalowsky, chief executive officer of Houlihan Lokey Howard & Zukin, said on another call offering his firm’s services to creditors, according to the person. Werbalowsky said there may not be time to complete a debt exchange before CIT goes bankrupt, the person said. Werbalowsky didn’t immediately return a call seeking comment.
Shares, Bonds Plunge
CIT’s debt tumbled and the shares plunged yesterday. CIT shares fell $1.23, or 75 percent, to 41 cents in New York Stock Exchange composite trading. CIT’s $1 billion in floating-rate bonds that mature next month fell 21 cents to 63 cents on the dollar, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Fitch Ratings slashed CIT’s credit rating seven grades to C today, saying in a report that “default of some kind appears imminent or inevitable.”
A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September and would trigger more credit-default swaps than any default since Lehman Brothers Holdings Inc. that same month.
‘Devastating Impact’
“In the short term it may have some devastating impact,” Al Ferrara, head of the retail practice at accounting and consulting firm BDO Seidman LLP, said in a telephone interview. “You may suck out some liquidity from retailers and vendors when they need their liquidity the most,” before the back-to- school season.
Talks with regulators broke off July 15 and “there is no appreciable likelihood of additional government support being provided over the near term,” CIT said in a statement. CIT, once the biggest independent commercial lender, may seek court protection if no U.S. aid emerges, Standard & Poor’s said.
President Barack Obama, “when he came into office, was clear that he would have a very high standard for what companies receive assistance from the federal government and the American taxpayer,” said Bill Burton, deputy White House press secretary, aboard Air Force One traveling to New York. “A lot of that had to do with whether or not they could show themselves to be sustainable in the long term.”
Burton said Obama didn’t make the call on denying CIT federal help.
It’s “highly likely” CIT will have to file for bankruptcy protection, said Egan of Egan-Jones Ratings. “As is, the company is broken.”
Source: Bloomberg