CIT Is Seeking Up to $3 Billion To Avoid a Bankruptcy Filing

By DAVID FABER

Updated 12:15 PM EST, Thu, Jul 16, 2009

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CIT, the finance company struggling to avoid a Chapter 11 filing as soon as tomorrow, is seeking to line up between $2 to $3 billion in secured financing from private investors over the next day, according to people close to the situation.

A number of private equity firms and fixed incomve investors have expressed interest in talking to CIT (NYSE: cit) about providing financing that would be secured by some of the company's currently encumbered assets, such as airlines and rail cars.

If it materializes, that financing would be incumbent on CIT gaining approval from regulators to move assets from the finance company to its bank.

These approvals are all CIT is currently asking of regulators, who have thus far indicated they would provide no addtional support for the company.

And so CIT finds itself in the postion of needing the approvals in order to have a chance to secure private capital and having regulators who appear unwilling to ofer those so called "non-objections."

The company is running out of time as its liquidity erodes quickly. If it could secure the private financing, CIT believes it could then buy enough time to pursue debt for equity swaps on some of its debt and have its capital structure properly aligned to prevent any future liquifty concerns.

Meanwhile, CIT's bonds with short term maturities have sold off from 90 cents on the dollar late yesterday to 60 cents Thursday.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

"As a result, we expect the company to file for bankruptcy in short order," they added.

CIT's 5 percent notes due in 2014 fell to 52 cents on the dollar early Thursday from 61.5 cents late Wednesday, according to MarketAxess.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

The company was not immediately available to comment.

If CIT were to go bankrupt, it would join Lehman Brothers and Washington Mutual among large financial companies to collapse since the credit crisis accelerated last September.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "we believe the figure is in the range of $4 billion to $6 billion plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

Costs to insure CIT's debt against the risk of default surged. CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

Sad End

CIT's problems surfaced two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans, both potentially highly profitable but fraught with added risk.

Founded in St. Louis in 1908, CIT boasts on its Web site that a million business customers depend on it for financing. Many may now have to turn to another firm at a time when credit markets remain tight, reducing business activity as the government tries to lift the economy out of a deep recession.

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CIT sought new help even after winning bank holding company status in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

The Treasury Department had been considering an aid package that could have included a temporary loan, access to the Federal Reserve's discount window, or asset transfers to CIT's banking unit, a person familiar with the matter said. The person requested anonymity because the talks were private.

Federal Deposit Insurance Corporation Chairman Sheila Bair, whose office is already under strain as banks fail by the dozens, had been reluctant to let CIT issue government-guaranteed debt, believing that a program allowing such issuance was designed for healthy institutions.

"This marks a sad end for the 100-plus-year-old finance company," Stifel Nicolaus analysts said.

—Reuters contributed to this report

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