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CIT Seeks Up to $3 Billion to Avoid a Bankruptcy Filing

Thursday, 16 Jul 2009 | 2:57 PM ET

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.

CNBC.com

A number of private equity firms and fixed income investors have expressed interest in talking to 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 additional 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 offer 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 liquidity concerns.

Meanwhile, CIT's bonds with short term maturities have sold off from 90 cents on the dollar late Wednesday 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."

Fitch Ratings downgraded CIT to C from BB-minus, adding the lender will have to file for bankruptcy in the very near term.

Sandler O'Neill analysts said an asset sale or a debt restructuring would only provide temporary relief to the lender, also suggesting a bankruptcy was the most likely scenario.

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.

CIT has about $40 billion in long-term debt, according to CreditSights. Around $1.1 billion of debt will come due in August, followed by about $2.5 billion by year end.

In addition, the net amount of credit default swaps based on CIT's debt is about $3.46 billion, according to data from the Depository Trust and Clearing.

"We can only guess that CIT was playing a game of chicken, and the government did not blink. CIT has really put itself in a tight and precarious situation, in our view, given the lines and the looming August maturity," JPMorgan analysts said.

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.

The White House said on Thursday that President Barack Obama had set high standards for granting aid to companies, a day after CIT said bailout talks had ended.

"A lot of that had to do with whether or not they could show themselves to be sustainable in the long term," White House spokesman Bill Burton, when asked about the troubled lender, told reporters aboard Air Force One with the president headed for New York.

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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