Debt Plan Falls Short of Fixing CIT Lending

By APARAJITA SAHA-BUBNA and KATE HAYWOOD CIT Group Inc.'s proposed debt-restructuring plan, even if successful, may do little to fix the company's broken lending business. The aim of the debt exchange is to get bondholders with about $31 billion in debt to cut it by at least $5.7 billion and to extend debt maturities. If a sufficient number of creditors sign on, this reduction in debt load will help CIT avoid bankruptcy court, for now. However, it may not help the lender grow its way out of its troubles. CIT's ability to raise funds cheaply, a key requirement for any lender, remains limited by low credit ratings and restrictions imposed by a banking regulator. Unless these hurdles are removed, the company can do little to revive its lending business, analysts say. It may be forced to use the breathing room granted by the restructuring to wind down its loan book and shrink to a shell of its former self. "When I look at the company, I don't think they're doing enough to reduce leverage," says Adam Steer, an analyst at CreditSights Inc., an independent credit research firm. "There's still a high risk of bankruptcy down the road, even if the debt exchange is successful. The best course of action is for CIT to run its business off." Mr. Steer says CIT needs to reduce its total debt by about $9.3 billion -- a far cry from CIT's target minimum of $5.7 billion -- in order to get access to the capital markets. A heftier debt reduction would also give CIT a better shot at persuading the Federal Deposit Insurance Corp. to lift restrictions on CIT Bank's ability to grow deposits. CIT, a century-old company that is one of the largest lenders to thousands of small and medium-size businesses, traditionally has relied on the capital markets -- bonds and short-term debt called commercial paper -- for its funding. In turn, it loaned out these funds at higher interest rates and pocketed the difference as income. The credit freeze, however, shut out CIT and other lenders from these markets, eliminating this key source of relatively cheap money. Deposits are an alternative and stable source of low-cost funds, but the FDIC has forbidden CIT to increase its deposits because of concerns around the company's financial well-being. Ultimately, CIT's fate could depend on its ability to persuade the agency to allow CIT's bank unit to accept deposits. An FDIC spokesman declined to comment on the CIT case. A CIT spokesman also declined to comment. In a regulatory filing on Friday outlining the details of the company's restructuring efforts, CIT said: "A strong capital position and liquidity profile should afford CIT the time and resources required to execute on its broad business restructuring strategy, including refinement of its business model, liquidation or sale of select businesses or portfolios, efficiency enhancements and long term bank-centric funding strategy." In the second quarter, CIT spent more to raise money than it could charge its customers in interest, an obviously unsustainable practice for a lender. CIT's net interest revenue, or the difference between what it earned from the loans it extended and its borrowing costs, totaled a negative $19.1 million, compared with a positive $169.8 million a year earlier. If CIT's debt exchange is successful, it will lead to "a stronger balance sheet. [But] right now, CIT's business model is still broken," says Sameer Gokhale, an analyst at Keefe Bruyette & Woods. "If they don't get help from regulators and the FDIC, then the best they have achieved, [if the restructuring is successful], is time for doing an orderly liquidation of the company." If the debt-exchange offer fails, CIT will seek bankruptcy protection to reorganize under a prepackaged plan that would offer creditors less than what the company is now offering. The lender had warned investors several times over the last few months that it was seriously considering a bankruptcy filing as a means of restructuring its debts. Write to Aparajita Saha-Bubna at Aparajita.Saha-Bubna@dowjones.com and Kate Haywood at kate.haywood@dowjones.com