CIT Group Says Its Failure Risks Demise of Customers

CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate -- to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.

CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won’t allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”

Bonds, Shares Fall 

A failure of CIT, run by Chief Executive Officer Jeffrey Peek, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.

CIT’s $656 million of 5.125 percent notes due in 2014 fell 4.5 cents on the dollar to 53 cents as of 9:21 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 20 percent.

The stock declined 36 cents, or 23.5 percent, to $1.17 as of 9:36 a.m. in New York Stock Exchange composite trading. It dropped 46 cents, or 23 percent, last week.

The company, which reported more than $3 billion of losses in the past eight quarters, says it’s hired Skadden, Arps, Slate, Meagher & Flom LLP as an adviser.

New York-based Skadden is known for its work in mergers and acquisitions and bankruptcies. The firm represented BHP Billiton Ltd., the world’s largest mining company, in its $150 billion proposed acquisition of Rio Tinto, and advised Circuit City Stores Inc. in its bankruptcy.

Maturing Debt 

“Skadden is one of the principal law firms representing CIT,” Ritter said in an e-mail on July 11. “They represent the firm on a wide variety of corporate matters. CIT will not comment on any specific aspect of their engagement.”

Jay Goffman, co-head of Skadden’s global corporate restructuring group, declined to comment on the firm’s work for CIT.

CIT faces $10 billion of maturing debt through 2010 and hasn’t sold corporate bonds in more than a year, according to data compiled by Bloomberg.


Credit-default swaps on CIT rose 2 percentage points to 39.5 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $3.95 million initially and $500,000 annually to protect $10 million of CIT debt for five years. The upfront cost reached the highest since Oct. 17, when it climbed to a record 41.5 percent, according to CMA DataVision prices.

Bondholder Protection 

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

CIT, which says it was the first to offer credit to help consumers nationwide buy Studebaker cars, funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. CIT says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.

CIT became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury.

Risk to Taxpayers 

The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking, who declined to be identified because the talks are private, said last week. Since Nov. 25 the FDIC has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program, designed to give creditworthy borrowers access to funds after debt markets seized up following the failure of Lehman Brothers Holdings Inc.

The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.

‘Active Discussions’ 

CIT is in “active discussions” with regulators on a “series of measures to improve the company’s near-term liquidity position,” it said in a statement distributed by Business Wire today. The talks include CIT’s application for FDIC funds and measures such as the transfer of assets to CIT Bank, it said.

CIT’s internal report outlines the potential effects of a failure on customers to which it’s committed $3.9 billion of bank lines.

A “substantial portion” of clients “would not have easy access to additional revolving credit without CIT,” according to the documents. “This could lead to business failure for those who lack additional liquidity.”

BlueTarp Financial is “one of many small businesses that rely on CIT, and without a player like them there is no one else to turn to,” said Bond Isaacson, CEO of the Charlotte, North Carolina-based provider of trade credit to building contractors.

“We are treading on thin ice if CIT is allowed to fail and with them will go a lot of small businesses,” Isaacson said.

The company has already cut back on arranging new loans and its failure wouldn’t cause widespread problems, said Kathleen Shanley, a Chicago-based bond analyst for Gimme Credit LLC.

“Absent a change of heart on the part of the FDIC, it is difficult to see how CIT can survive,” Shanley said. “Fixed income investors have lost confidence in the viability of CIT’s business model, which will make it extremely difficult for the company to fund its upcoming debt maturities and ongoing operations.”

- Via Bloomberg