CIT Denied Bailout, Bankruptcy Likely
NEW YORK — Denied a federal bailout, CIT Group Inc. said late Thursday its board and management continue to seek alternatives to shore up the company's cash position and remain in talks with potential lenders to secure financing and stave off a bankruptcy protection filing.
CIT saw its shares plunge 75 percent Thursday as bondholders scrambled to find an 11th-hour solution that would keep the commercial lender out of Chapter 11. But there is no guarantee they will be able to save the ailing company, which teeters on the brink after failing to get emergency government funding.
CIT said late Wednesday that talks with regulators about a possible rescue had broken off after days of round-the-clock negotations. The move marked a defining moment for the Obama administration and showed it's drawing a line in the sand on federal rescues for troubled financial firms.
In a last-ditch effort to avoid bankruptcy, CIT is trying to line up $2 billion to $4 billion in rescue financing from its debtholders within the next 24 hours, two sources familiar with the talks told The Associated Press. They requested anonymity because they weren't authorized to speak publicly.
CIT bondholders discussed their options Thursday in a conference call that involved restructuring firm Houlihan Lokey, according to the sources. Another conference call with the largest bondholders was to be organized by bond manager Pimco later in the day, the sources said. Houlihan Lokey and Pimco didn't return calls seeking comment.
If CIT can improve its liquidity, either through debt restructuring or by getting an injection of private equity, that could give it better leverage to reopen talks with regulators. The most likely avenue for survial would be getting permission to transfer assets to the company's bank. The bank could then borrow against that money at a discount if the Fed allows it.
Such transfers require approval from the Fed and the FDIC because regulators don't want banks – whose deposits are insured – to risk insolvency by bailing out their parent companies.
Regulators resisted CIT's earlier plea for permission to make a transfer because they didn't think the company was strong enough, and worried it would default on any loans from the Fed. With a stronger balance sheet, CIT may make a better case.
But investors were acting as if bankruptcy were unavoidable, sending CIT shares skidding $1.23, or 75 percent, to close at 41 cents after sinking as low as 31 cents earlier in the session.
Both Fitch Ratings and Moody's further downgraded CIT's debt Thursday following the company's announcement that it expects no further federal support.
"I think it makes a bankruptcy filing a near certainty," banking analyst Bert Ely said of the refusal to bail out CIT.
Meanwhile, shares in the broader market traded higher. According to preliminary calculations at the market's close, the Dow Jones industrial average rose 95.61, or 1.1 percent, to 8,711.82. The Standard & Poor's 500 index rose 8.06, or 0.9 percent, to 940.74.
The muted response by the overall market to CIT's woes suggests investors are more focused on signs that the economic slump may be easing, said Paul Baiocchi, senior market strategist at Delta Global Advisors in San Francisco.
CIT's small size relative to other big commercial banks may also ease worries of a ripple effect. Though a major lender to small and midsize U.S. business with about a million clients, CIT is one-eighth of the size of Lehman Brothers when massive credit losses forced the investment bank into bankruptcy last fall.
CIT had also begun cutting back on lending in recent months, diminishing the risk a possible bankruptcy could cause significant damage to the broader economy. The lender had $5.3 billion in credit lines to customers as of March, down from $6.1 billion at the end of 2008.
"That shows they were pulling back and should lessen the immediate blow of this," said Kathleen Shanley, an analyst at corporate bond research firm Gimme Credit. "I don't see a real contagion effect here."
CIT, which got $2.3 billion of bailout money in December, had warned that depriving it of more federal aid could imperil about a million corporate borrowers – from Dunkin' Donuts franchisees to retailer Dillards Inc.
The Bush administration paid a price for its decision not to save Lehman Brothers, whose collapse helped spark the financial crisis last fall.
Asked about CIT, a Treasury Department spokeswoman said in an e-mail that "even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."
A bankruptcy filing would wipe out CIT's shareholders and the government's $2.3 billion stake. But CIT's clients would not automatically lose their lines of credit, longtime banking analyst Bert Ely said.
Still, with other lenders to retailers already under financial strain, many CIT clients may lose their financing options.
"The industry just won't be able to absorb the amount of volume," said Michael Cipriani, executive vice president of Rosenthal & Rosenthal Inc., a competitor of CIT that's considered healthy.
The company in April posted a larger first-quarter loss than expected and has seen funding options disappear as investors shy away from purchasing all but the safest forms of debt. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.
Though a fraction of the size of big commercial banks, CIT's holdings are substantial. The company had $75.7 billion in assets as of March 31, according to a corporate filing.
Lehman Brothers, which collapsed after former Treasury Secretary Henry Paulson declined to save it, listed $639 billion in assets when it filed for bankruptcy Sept. 15.
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Wagner reported from Washington. AP Economics Writers Jeannine Aversa and Martin Crutsinger in Washington, and AP Retail Writer Anne D'Innocenzio in New York contributed to this report.
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STEVENSON JACOBS and DANIEL WAGNER | 07/16/09 07:30 PM |