Sunday, July 12, 2009

Major Lender Faces Crunch

CIT Hires Bankruptcy Adviser as Payment Looms; Financier to 1 Million Businesses By JEFFREY MCCRACKEN and SERENA NG CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter. To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said. The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything." CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks. CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities. CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank. The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate. CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government." A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT. On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day. The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year. The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses. A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter. One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms. Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating. According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems. CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion. Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst. In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal. In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom. When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables. "They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business. Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said. Write to Jeffrey McCracken at and Serena Ng at

No comments: