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CIT Shares Fall on Credit-Quality Concerns

Shares of commercial lender CIT Group plunged Friday as uncertainty mounts over whether it can get federal backing for its bonds.

The New York-based financier to small and mid-sized businesses faces a liquidity crisis absent help from the government, according to analysts.

Hundred Dollar
Bill Haber
Hundred Dollar

CIT is still awaiting word on whether it will receive funds from the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, which lets cash-squeezed companies issue government-backed bonds to raise capital at a lower cost. As of June 8, the program has backed $335.4 billion of debt.

FDIC Chairwoman Sheila Bair has said that the program is selective about the companies admitted to limit taxpayer exposure. The program gives preference to companies with high credit ratings or that are considered pivotal to the overall economy. CIT spokesman Curt Ritter confirmed Friday that the company's application to the FDIC program remains outstanding.

"We continue to be in discussions with the government," he said.

Still, analysts are increasingly concerned that CIT will not be granted access to the TLGP program, which may put bondholders at risk as more of CIT's outstanding debt comes due.

It is "highly unlikely" that CIT will get additional government help such as access to the bond-guarantee program, CreditSights analysts David Hendler and Adam Steer said.

"We cannot come up with an overly compelling reason why the FDIC would want to put its capital at risk to support CIT," they wrote in a research note earlier this week. "CIT is not in our view a systemic institution."

Shares of CIT fell 43 cents, or 23 percent, to $1.43 in midday trading and earlier hit a 52-week low of $1.13. The shares have lost nearly 70 percent of their value in 2009.

CIT already received $2.3 billion in government bailout funds in December, as part of the $700 billion rescue fund created by Congress last October. It had to convert to a bank holding company to access the money.

The lender faces maturing debt of $7.4 billion in the first quarter of 2010, plus other obligations, and options are running low for the company to raise capital, Hendler and Steer said. They contend that it will be difficult for CIT to tap funds through a stock sale and other financing is scarce.

CIT could issue debt without government backing to help it in the near term, but it has to carry a high yield to attract investors.

As a bank holding company, CIT could raise retail deposits, but that would take time and would require regulator approval, according to Fitch Ratings. Along with other businesses, CIT was hurt by the credit crunch that dried up financing. Last week, it agreed to sell about $10 billion in mostly subprime mortgage loans.

CreditSights said CIT could also sell some of its businesses. However, only its trade and transportation finance businesses posted profits in the last 12 months.

On Wednesday, Fitch downgraded the company's issuer default, individual and debt credit ratings deeper into junk status affecting $35 billion of debt.

It upgraded CIT's support rating as the company remains reliant on government aid. But Fitch warned that without federal intervention, ratings would be lowered again to levels indicating that a default is "a real possibility."

"They do have upcoming debt and the ability to raise money on cost-effective terms is going to be very important," Fitch analyst Christopher Wolfe said Friday.

Last month, Standard & Poor's Ratings Services also downgraded CIT's credit rating and Moody's Investors Service did the same in April.