CIT Group Crawls Back From the Brink


When CIT Group declared bankruptcy in 2009, it became the only company that accepted a bailout, but failed to return the government’s money. Taxpayers were on the hook for $2.33 billion, creating further need for government policing.

The company was given three options during reorganization. “Liquidate. Sell yourself. Or work your way through it,” a source said.

With John Thain taking the helm, CIT chose to work its way out. And Thain recently said he expects the company to meet written requirements from the Federal Reserve—to gain independence by complying with all policies and procedures of bank holding companies, a title it took in 2008—as soon as the end of 2011.

In the meantime, it’s chipping away at the mountainous debt that dragged it down. The company on Wednesday made its first post-bankruptcy trip back to the capital markets, issuing $2 billion in two tranches of high-yield bonds.

What's surprising is this: Though the bonds priced in junk territory, they drew the interest of investment-grade buyers, who are expecting the company to re-enter that territory by the time the notes mature. Just over a year ago, CIT Group earned a pre-bankruptcy rating of “D” from Standard & Poor’s.

"This offering has to be seen as a real shot in the arm for [CIT's] long-term viability," said Jeff Werbalowsky, CEO of Houlihan Lokey. A bellwether of success, especially when compared to the uncertainty of CIT's balance sheet when it emerged from bankruptcy.

Part of this is because investors are on a hunt for yield, anywhere they can find it. One trader involved in CIT said of participating, “We're in a market where time and yield can transcend the individual credit.”

But the individual credit under Thain is shaping up.

The company has used its own cash to retire more than $7 billion in debt. CIT paid down $4.5 billion in first-lien debt, where interest stood in double-digits, and refinanced the remaining $3 billion at 6.5 percent. CIT then repaid $2.1 billion of Series B debt, which was completed early this year.

And now it’s using the proceeds from Wednesday to pay down $1.6 billion in a mountain of Series A debt currently totaling about $20 billion. It said it started repayment in the first quarter and will refinance the rest as the market allows.

Reducing the cost of funding is what’s paramount now. CIT paid more than $3 billion in interest expense in 2010, nearly canceling out its interest income, which is growing as demand for middle market loans swells.

But the irony is that the easiest way to trim debt costs would be by selling to a big bank like Wells Fargo , according to Sandler O’Neill analyst Michael Taiano. That would help CIT, a bank holding company, gain entrée to the robust deposits of a full-service bank, where interest stands at less than 1 percent. (CIT’s interest now averages well above 5 percent, Taiano said.)

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