CIT warns of $1.5bn Q2 loss and bankruptcy

CIT Group said it may post a loss exceeding $1.5 billion (Dh5.5bn) for the second quarter and could file for bankruptcy protection if bondholders reject a debt restructuring, raising new fears that the lender to some one million businesses might fail.

A couple of days after winning $3bn in emergency financing, CIT said it might still be headed for bankruptcy court if it is unable to get enough support for a tender offer for notes that mature next month.

Several analysts and bankers have said the rescue financing might only delay a bankruptcy filing, in light of skittishness among CIT's small and mid-size business customers, and the 101-year-old lender's inability to readily tap capital markets.

Microsoft Corp said it had terminated a vendor-financing deal with lender CIT.

"We think every day the odds of bankruptcy are substantially higher," said Keith Wirtz, President and Chief Investment Officer, Fifth Third Asset Management.

"They are fighting a huge uphill battle, and all the efforts to source temporary funding are having little reception," he said.

Problems at CIT stemmed in part from Chief Executive Jeffrey Peek's decision earlier in the decade to expand into sub-prime mortgages and student loans.

The New York-based lender has lost close to $3.3bn since the end of 2007.

The US Government declined help to CIT, forcing the company to turn to private investors for critical cash. "A lot of people out there think this could be just a band-aid," said Christopher Munck, a high-yield bond trader at B Riley and Co in Los Angeles. "These guys aren't out of the woods yet, and I don't think anybody believes they are."

CIT's problems came even after the company in December received $2.33bn from the government's Troubled Asset Relief Programme.

The company has been denied access to a Federal Deposit Insurance Corp programme to sell government-backed debt, and said the debt tender offer announced on Monday is only a first step to building necessary liquidity for the long term, a process it said could include asset sales.

"Disruptions in the credit markets that began in 2007... have materially worsened in the first and second quarters of 2009," said CIT in a regulatory filing.

CIT is tendering for nearly $1bn of floating-rate senior notes due August 17, offering 82.5 cents on the dollar for bondholders who tender before July 31.

According to MarketAxess, the notes were trading at around 85 cents on the dollar on Tuesday, a sign that bondholders are likely to hold out for a higher price.

CIT said that if it filed for bankruptcy, the FDIC could place its banking unit into receivership or conservatorship, shielding its assets from creditors. The cost of insuring $10 million of CIT debt against default for five years rose to $4.7m plus annual payments of $500,000. On Monday the upfront payment was $3.914m.

"This indicates both a high likelihood of default and a market perception that if a credit event occurs, the recovery levels would be low," said Hexagon Securities analysts in a research note.

The company estimated funding needs for the year ending June 30, 2010, include $7bn of unsecured debt. "Existing liquidity for the same period is not sufficient to make the upcoming August 17, 2009, maturity payment... or otherwise meet the company's twelve-month funding requirements," said CIT.

It also said the FDIC and the Utah State Department of Financial Institutions had barred its banking unit from lending or paying dividends to CIT without regulators' approval.

CIT has about $40bn of long-term debt, said independent research firm CreditSights. The lender said the New York Federal Reserve Bank on July 14 completed a preliminary stress test of the company, concluding that it needs $4bn of regulatory capital, including $2.6bn of Tier-One capital.

CIT has been trying to get regulators' approval to transfer some assets from the holding company to its bank.

A bankruptcy would make CIT, with $75.7bn of reported assets, the largest US financial company to go bankrupt since Lehman Brothers Holdings.


CIT rejects GE offer

CIT Group rejected a General Electric offer of at least $2 billion (Dh7.3bn) in senior secured loans backed by aircraft, said sources.

CIT spurned the loans from GE's finance arm, a rival in some lending businesses, over the weekend in favour of $3bn in loans from a group of bondholders, said two of the sources.

GE's offer, while less costly and requiring fewer assets as collateral, would not have provided cash until July 31 because of a delay in structuring the deal, said two of the people, who didn't want to be identified because the offer was not public.

By contrast, CIT received $2bn of the bondholders' loan yesterday, with the rest expected by the end of the month. CIT described the bondholder deal in a statement yesterday as the first step in a "comprehensive restructuring" of liabilities that would require bondholder cooperation.

CIT sought rescue financing after it was not able to obtain a second government bailout in the form of debt backstops under the Temporary Liquidity Guarantee Programme.

GE has itself issued about $70bn of debt guaranteed by the Federal Deposit Insurance Corp under the TLGP, of which about $32bn is commercial paper. GE has sold $12bn in debt without a guarantee this year.

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