(BN) CIT $3 Billion Rescue May Not Provide Permanent Cure

(Adds analyst comment in sixth paragraph.)
By Pierre Paulden, Caroline Salas and Ari Levy
July 21 (Bloomberg) -- CIT Group Inc.’s $3 billion financing pledge from bondholders may fail to shield the commercial lender from about $10 billion of debt maturing through next year, mounting loan defaults and a shrinking market share.
"The company has indicated they have significant upcoming maturities," said Renee Dailey, a partner in the financial restructuring group at law firm Bracewell & Giuliani LLP in Hartford, Connecticut. "It’s unlikely that $3 billion will solve their problems."
CIT announced an agreement with bondholders to provide the emergency financing late yesterday, keeping the 101-year-old commercial finance company out of bankruptcy. The first $2 billion of the 2 1/2-year loan is available immediately, with the rest expected in the next 10 days, New York-based CIT said.
The company said the deal is the first step in a bigger restructuring and it’s also asking debt holders to agree to reduce their claims.
The company, led by Chief Executive Officer Jeffrey Peek, was brought to the brink of collapse by more than $3 billion of losses in the past eight quarters on soured home mortgages, student loans and commercial defaults.
The group of bondholders stepped in after the U.S. declined to give a second bailout to the firm. The lender finances about
1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc., and Moody’s Investors Service said July 16 CIT probably would go bankrupt.

‘Not Over’

"It’s not over," said Hank Calenti, a credit analyst at Royal Bank of Canada in London. "This is the first of many steps needed to right the ship."
CIT has $1 billion of notes that mature Aug. 17 and is asking investors to swap those securities for 82.5 cents on the dollar. Those who exchange later will receive 80 cents and the offer requires 90 percent approval.
CIT called the exchange "the first step in a broader recapitalization plan" that will include "a comprehensive series of exchange offers designed to further enhance CIT’s liquidity and capital." The company canceled an earnings announcement scheduled for July 23.
More than 75 bankers worked through the weekend in New York and London to complete the deal, said a person with knowledge of the plan, who declined to be identified because the negotiations were private.

Cost of Financing

CIT will pay interest of 10 percentage points more than the three-month London interbank offered rate, people familiar with the matter said yesterday. Libor, a lending benchmark, is 0.51 percentage point. Libor will be set at a minimum of 3 percent, said a person familiar with the deal. The loan is backed by a mix of collateral, including corporate debt, loans to medium- sized companies and aircraft credits, the person said. CIT pledged assets that carry a face value of $30 billion, the New York Times reported, citing an unidentified person.
That "level of over-collateralization also suggests that CIT had few other options," Calenti said. "It means that if the rescue doesn’t work, recovery rates could be much lower for other lenders."
Bondholders providing the financing include Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silver Point Capital LP, a person familiar with the deal said. Spokesmen for the funds either declined to comment or didn’t reply to phone calls or e- mails. Barclays Capital is arranging the funding, CIT said.
Officials at the bank in London declined to comment today.

Pimco’s Stake

Morgan Stanley and Evercore Partners Inc. are CIT’s financial advisers, and Skadden, Arps, Slate, Meagher & Flom LLP and Wachtell, Lipton, Rosen & Katz are legal counsels, CIT said.
Pimco, which manages the world’s biggest bond fund, is CIT’s largest bondholder according to regulatory filings. Mark Porterfield, a spokesman for Pimco, didn’t respond to a phone call and an e-mail seeking comment.
CIT, once the biggest independent commercial finance firm in the U.S., sold for more than $61 a share in February 2007 on the New York Stock Exchange. The shares have since plunged to less than $2. They traded at $1.35 in Germany today, an 8 percent gain on yesterday’s close in New York.
The cash shortage has forced CIT to cut back its lending.
In the quarter ended June, CIT’s loans to small businesses plunged 88 percent to $65.7 million and the company fell to 15th in the category from first a year earlier, according to the La Canada, California-based Coleman Report.

Model ‘Not Fixed’

A bondholder bailout of the company "means they’re not going to file tomorrow," said Adam Steer, an analyst with CreditSights, before the plan was released. "I still, ultimately, think because CIT’s funding model is not fixed, there is a high chance that equity holders will be wiped out."
CIT’s $1 billion of floating-rate bonds that mature next month climbed 17 cents on the dollar yesterday to 87.5 cents, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds fell as low as 63 cents on the dollar on July 16, Trace data shows.
The firm’s plight attracted the attention of the Treasury and Federal Reserve and lawmakers including Massachusetts Democrat Barney Frank, the House Financial Services Committee chairman, on concern that CIT’s bankruptcy might worsen a credit crunch for entrepreneurs. Regulators turned down CIT’s appeals for help last week after Peek, 62, failed to convince officials that ripples from a collapse would threaten the rest of the financial system.

U.S. Stake

The U.S. holds a $2.33 billion stake in the form of preferred stock, acquired as part of a rescue in December financed by the Treasury’s Troubled Asset Relief Program. CIT converted to a bank holding company to also be eligible to sell bonds backed by the Federal Deposit Insurance Corp.
Last week, CIT’s advisers, including JPMorgan Chase & Co.
and Morgan Stanley, held talks with other banks about a debtor- in-possession loan to fund the company’s operations should it enter bankruptcy, people with knowledge of the matter said at the time. Bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter.
The FDIC, led by Chairman Sheila Bair, was concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

Lending Source

A halt in CIT’s lending would eliminate a source of funding for small firms when credit is already drying up. Banks tightened loan standards on small firms for 10 consecutive surveys, according to the Federal Reserve’s April poll of senior loan officers, and Advanta Corp., the credit-card company specializing in small businesses, cut off almost 1 million accounts in May after posting three quarterly losses.
CIT has said bankruptcy would put 760 manufacturing clients at risk of failure and "precipitate a crisis" for as many as 300,000 retailers, according to internal documents.