CIT Group Inc
The commercial lender is struggling to reduce debt and raise equity to stay in business. But repairing its balance sheet is just one step toward returning to health -- it must still figure out how to fund future business, analysts said.
At the end of the day, the business is not sustainable as it is, said Faris Saah, research analyst at Aladdin Capital in Stamford, Connecticut.
The exchange offer is likely to essentially turn the company over to bondholders, sources said Tuesday. Debt investors would get some combination of new debt secured by assets and shares in the company, and the company's overall debt levels would shrink. Little would likely be left for current shareholders, and CIT's shares fell 45 percent on Wednesday. Bonds also fell.
Engineering the exchange could be difficult. A debt exchange typically requires participation from owners of about 90 percent of the securities eligible to be swapped. For CIT, eligible securities would be roughly $32 billion of unsecured debt.
CIT plans to encourage bondholders to swap their notes by threatening a prepackaged bankruptcy, which could require holders of only about two-thirds of the company's total debt to sign on, sources familiar with the situation said.
CIT believes that a prepackaged bankruptcy could take one or two months, the sources said, asking not to be identified because the plan is not yet public. Some bondholders could do better in bankruptcy than a debt exchange.
Finance companies that file for the protection of bankruptcy courts are usually signing their own death certificate, but CIT believes it is an unusual case. The company has been around for more than a century, and many customers have signaled their loyalty to the lender, sources said.
And with credit generally tight for the small and mid-sized businesses that CIT caters to, there are few options for many of CIT's borrowers.
But a bankruptcy could still have some cost, noted Dan Fuss, vice chairman of Loomis Sayles, which oversees more than $140 billion of assets and owns some CIT debt. The company could lose future tax advantages from recent net losses if it files for bankruptcy, he said, which could hit its balance sheet.
My preference for them would be the debt exchange because then they won't go through the disruption of a bankruptcy, Fuss told Reuters.
If the company files for bankruptcy, it may not be able to emerge as a going concern and might instead have to wind down its business, Aladdin Capital's Saah said.
CIT's longer term plan is to essentially turn itself into a bank. The company is one of scores of lenders and underwriters that relied on bond markets to fund its operations, only to suffer as the credit crunch has raged for two years.
Becoming a bank may not be easy, analysts said. CIT has a small bank subsidiary with about $5 billion of deposits, compared with CIT's overall assets of about $71 billion. Regulators have barred CIT Bank from accepting new deposits.
Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds.
In July, CIT bought some time to restructure with the help of an emergency loan from a group of bondholders.
CIT's board has yet to sign off on the restructuring plan, but the board is briefed frequently and knows what the management has been working on, the sources said.
Bond giant PIMCO, Centerbridge Partners LP, Oaktree Capital Management, Baupost Group, Capital Research & Management Co and Silver Point Capital were part of a group that provided a $3 billion loan to the lender this summer.
Under the terms of the $3 billion July loan, CIT must come up with a restructuring plan agreeable to lenders by October 1. That plan will likely include debt exchange offers, the company said in a regulatory filing in August.
If the company goes through a prepackaged bankruptcy, it would need a debtor-in-possession loan to finance it during the process. Banks including Bank of America, Barclays, and Citigroup have talked to CIT about providing financing, but it was not clear which bank was lined up for DIP financing.
CIT's notes maturing next year with a 4.75 percent coupon fell about 2 cents on the dollar to 69.375 cents, according to MarketAxess data.
Debt protection costs for CIT rose on concerns about the company's restructuring. CIT's five-year credit default swaps rose to an upfront payment of 36.2 percent the sum insured plus 500 basis points a year from 34 percent, according to CMA DataVision. That means it would cost $3.62 million to insure $10 million of debt plus $500,000 a year.
CIT shares fell 99 cents to close at $1.21.
(Reporting by Dan Wilchins and Paritosh Bansal; additional reporting by Jennifer Ablan and Walden Siew; editing by John Wallace, Matthew Lewis and Andre Grenon)