CIT Group Inc and government officials remained locked in talks on Tuesday as the lender to thousands of small businesses pushed for government aid in its fight to survive.
Shares of the lender rebounded sharply as investors bet that the discussions would be fruitful, averting a disruption in credit for many companies.
CIT, which finances airlines, railways, retailers and manufacturers, is struggling to refinance debt as the two-year financial crisis has cut off its access to the corporate bond market.
Analysts said that U.S. regulators must weigh how badly a CIT failure would damage confidence in financial markets and hurt credit availability for smaller companies against the costs of government backing for another ailing American company.
A CIT spokesman confirmed that talks with the government continued on Tuesday, but gave no details.
They're major players when it comes to financing, said Richard Lee, managing director of fixed income at independent broker dealer Wall Street Access. But I don't see the same type of impact if CIT goes under as when AIG was being batted around and GE Finance and some of the other stalwarts.
The U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp have been exploring aid options for the lender, and there was no indication on Tuesday that the FDIC's opposition to giving CIT access to a debt guarantee program was wavering.
According to people familiar with the matter, the FDIC has expressed concerns about heavy risks associated with CIT's junk-status credit rating, the quality of its assets and its liquidity problems.
The three regulatory agencies, which have been at the heart of financial rescues over the past year, all declined on Tuesday to comment on CIT's situation.
CIT's shares closed up 19.26 percent at $1.61 on the New York Stock Exchange.
People are speculating that CIT is going to get government assistance, said David Chiaverini, analyst with BMO Capital Markets in New York.
A CIT spokesman did not respond to requests for comment on the status of talks.
Goldman Sachs analysts said that CIT bankruptcy fears were overdone and that the company had some $32 billion of assets it could sell to improve its liquidity. If it does this, it could qualify for some government aid, Goldman's Louise Pitt and Joseph Schatz wrote in a research report on Tuesday.
CIT received $2.3 billion from the Treasury's $700 billion financial bailout fund in December when it converted to a bank.
While we do not think that CIT constitutes a systemic risk for the U.S. banking sector, we think that the government would be reluctant to accept the loss of this investment, Pitt and Schatz wrote.
LENDERS AT THE READY
A Washington lobbyist for community banks applauded FDIC Chairman Sheila Bair for opposing allowing CIT to access its guarantee program because depository banks would end up paying the costs of any losses if the company defaults.
The Treasury and Fed want the FDIC to step into the breach and rescue CIT, said Camden Fine, president of the Independent Community Bankers of America.
I'd rather see the Treasury step in with TARP money than to see them (CIT) go anywhere near the FDIC, said Fine.
He said there were plenty of other lenders that could make loans to smaller companies if CIT failed.
CIT was the top lender to small businesses in fiscal 2008, lending $524.9 million, according to Small Business Administration data. But so far in fiscal 2009, which ends September 30, it has fallen to 16th, with loans of $65.7 million.
The upfront cost to insure $10 million of CIT debt for five years fell to $3.8 million from $4.05 million late on Monday, plus annual payments of $500,000, according to data from Phoenix Partners Group.
Shares of CIT have fallen 70 percent this year.
(Reporting by Elinor Comlay in New York and David Lawder in Washington; additional reporting by John Parry in New York; Editing by Toni Reinhold)