CIT in talks with regulators; stocks, bonds fall

NEW YORK - CIT Group Inc, which provides financing to small and mid-sized businesses, said it is discussing with regulators ways to bolster its finances if it fails to win access to the Federal Deposit Insurance Corp’s Temporary Liquidity Guarantee Program.

By (Reuters)

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Published: Mon 13 Jul 2009, 8:36 PM

Last updated: Thu 2 Apr 2015, 7:35 AM

The New York-based commercial lender said there is no assurance it will be granted access to the FDIC program, and it remains in talks about how to improve liquidity after losses resulted in a capital crunch.

CIT shares tumbled nearly 25 percent in morning trade, and its 5 percent notes due in 2014 fell to 48 cents on the dollar from 57 cents on Friday.

The delay in getting FDIC approval has driven CIT deeper into a liquidity crunch. Over the weekend, the Wall Street Journal said the company had hired top law firm Skadden, Arps, Slate, Meagher & Flom LLP to explore a possible bankruptcy filing. A CIT spokesman confirmed that the company had retained Skadden but declined to elaborate.

The Journal said the government has made clear that a bankruptcy by CIT would not be seen as a systemic risk to the financial system, as other lenders such as JPMorgan Chase & Co and Deutsche Bank AG can take on many of the same loans in which CIT specializes.

Small businesses, particularly retail, could feel some pain from a CIT bankruptcy.

Asset Transfers

To boost liquidity, CIT said it is discussing a transfer of assets into its CIT Bank unit by obtaining a waiver of a Federal Reserve rule that limits such transactions. It said it may transfer vendor finance and trade finance businesses.

CIT has lost close to $3.3 billion since the end of 2007 and has said it has a $10 billion funding gap in the year to March 31, 2010. In December it became a banking company and obtained $2.33 billion from the government’s Troubled Asset Relief Program.

The lender has been hard hit by the two-year-old credit crisis and has tried various capital-raising plans — including growing its retail bank and selling assets and stock — to pay off maturing debt and prevent further rating downgrades.

It has been trying to increase its bank deposits at CIT Bank to provide a more stable form of funding while capital markets remain restricted.

Last year, CIT shopped its $4.5 billion railcar leasing unit for several months, then shelved this plan after commercial lender GATX Corp, which had been seen as a potential buyer, offered more than $3 billion for a similar business owned by General Electric Co.

Ripple Effects

“Bankruptcy at CIT could have negative ramifications for small businesses dependent on credit to fund growth,” said Melinda Crump, a spokeswoman for Sageworks Inc, which tracks and collates the financials of thousands of privately held U.S. companies. “It’s a difficult lending environment, and those small retailers that have seen sales slow to a minimum already may have a hard time securing lending sources until spending picks up.”

But restructuring executives said it was unlikely that CIT’s widespread factoring business would collapse.

Factors buy the right to collect on the invoice of a retailer or other company at a discount to the value of the invoice. Then the factor assumes the risk that the invoice will not be paid.

“CIT has been an important provider of credit to not only retailers and retail suppliers but a vast array of businesses for over 100 years,” said Scott Avila, a partner for corporate restructuring adviser CRG Partners.

CIT shares were down 38 cents at $1.15 in morning trading on the New York Stock Exchange.

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