The Malaysian Insider

NEW YORK, July 25 — CIT Group Inc, a 101-year-old lender fighting for survival, is planning a large debt exchange offer within weeks and may not sell any assets before fixing its capital structure, a source close to the company said yesterday.

CIT, which lends to nearly a million small and mid-sized companies, has already launched a cash tender offer for some notes, and earlier yesterday amended the terms to encourage more bondholders to tender their notes early.

The planned exchange offer would likely include debt-for- debt and debt-for-equity exchanges and work across all bond maturities or a significant portion of them, said the source, who declined to be named because the plans are not public.

While CIT’s collapse would not pose a systemic risk, according to analysts, it could hurt manufacturers’ and retailers’ financing as they approach the holiday season, worsening the effects of the economic downturn.

“They are a huge supplier of capital for not just retailers, but also for vendors and, if the supply chain of inventory gets interrupted at holiday season, that could have a negative impact on the sector,” said Daniel Hurwitz, chief operating officer of shopping centre owner Developers Diversified Realty Corp, told analysts.

CIT has estimated that its funding needs for the year ending June 30 include US$7 billion of unsecured debt. It has about US$40 billion (RM141.28) of long-term debt, according to CreditSights.

CIT is also considering asset sales as part of the longer-term restructuring plan, said the source, who added the company had no reason to believe regulators would change their mind about helping the lender.

The specialty lender had asked regulators for permission to transfer some assets to its banking unit in Utah and issue debt under a government-backed programme, but they refused, pushing the company to the brink of bankruptcy.

“The company is doing what it can to try to avoid a bankruptcy court,” said KBW analyst Sameer Gokhale. “It may be the best possible outcome for all stakeholders, including the government with its US$2.3 billion TARP investment.”

CIT’s problems stem in part from Chief Executive Jeffrey Peek’s decision earlier in the decade to expand into subprime mortgages and student loans.

The New York-based lender estimates it lost more than US$1.5 billion in the second quarter due to bad loans and writedowns.

Concerns about the company’s financial health increased even after CIT received the TARP capital in December.

CIT repeated yesterday in a regulatory filing that it could still file for bankruptcy if the offer failed and it did not obtain additional financing.

“LOAN SHARK RATES”

On Monday, CIT launched a tender offer for US$1 billion of notes due in August in the first step of a restructuring plan after the collapse of rescue talks with the US government.

The lender said yesterday it increased the premium for bondholders who enter the restructuring plan before July 31 to US$50 per US$1,000 of principal amount.

Bonds tendered before July 31 will be bought back for US$825 per US$1,000 face amount, while those tendered later will be bought for US$775. Initially, the company had offered to buy back the bonds for US$800 per US$1,000 face amount, with a US$25 premium for those noteholders that tendered them by July 31.

“Pretty clearly they are giving an incentive to people to do it sooner rather than later,” Gokhale said.

CIT stock closed up 1 cent at 75 cents on the New York Stock Exchange. They were up another 6.7 per cent to 80 cents in after hours electronic trading.

CIT’s floating rate notes due in August traded yesterday at 80.125 cents on the dollar, up from 79.375 cents at close two days ago, according to MarketAxess.

“The problem with CIT is that their raw material, which is money, costs them far, far more than their competitors,” billionaire investor Warren Buffett said in an interview with Fox Business Network.

“You can’t pay loan shark rates and compete with people who are getting their money on a government guaranteed basis for practically nothing.”

Buffett’s Berkshire Hathaway Inc offered to buy some CIT assets last year, but was turned down because the offer price was considered too low, The Wall Street Journal reported yesterday.

RESTRUCTURING PLANS

The New York Federal Reserve Bank has concluded in a stress test that the company needs US$4 billion of regulatory capital.

The firm could sell its aviation finance and rail finance operations as part of its restructuring plan, the Journal said, citing sources familiar with the matter. — Reuters