CIT Expects Loss of $1.5 Billion, May Seek Bankruptcy

Dejavu all over again.

CIT Expects Loss of $1.5 Billion, May Seek Bankruptcy(Update2)
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http://www.bloomberg.com/apps/news?pid=20601087&sid=aqSnZwE5C3ss

By Caroline Salas, Pierre Paulden and Linda Shen

July 21 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender seeking to avoid collapse, said it expects to report a loss of more than $1.5 billion for the second quarter and may need to file for bankruptcy if it’s unable to tender for notes maturing next month.

CIT’s “existing liquidity” isn’t enough to repay the $1 billion of floating-rate notes maturing on Aug. 17, the New York-based lender said today in a regulatory filing. CIT, which announced a $3 billion rescue financing from its bondholders yesterday, has asked holders of the August notes to swap their claims for 82.5 cents on the dollar.

“The company is right on the precipice,” said Ricardo Kleinbaum, a credit analyst at BNP Paribas SA in New York. “We have a coercive tender where bondholders are being asked to participate and cross their fingers there isn’t a bankruptcy down the road. It’s not clear what the end game will be.”

CIT, led by Chief Executive Officer Jeffrey Peek, was brought to the brink of failure after reporting $3 billion of losses in the last eight quarters. The company turned to its bondholders for funding after it was unable to obtain a second government bailout. CIT, which hasn’t had access to the corporate bond market in more than a year, said today it needs to repay $7 billion of unsecured debt through June 30.

Pre-tax items contributing to the quarterly loss include a $693 million goodwill and intangible assets impairment expense, an approximately $500 million provision for credit losses and a $185 million loss on a $1 billion sale of receivables that were “sold for liquidity purposes,” CIT said in the filing.

Denied FDIC Backing

The lender, which converted to a bank in December and received $2.33 billion in funds from the U.S. Treasury, has been denied access to the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program to sell U.S.-backed debt.

“Late in the second quarter of 2009, our available liquidity dropped below the level necessary to operate our business,” CIT said in the filing. “Even if the offer is consummated successfully, we will require significant additional funding during the remainder of 2009 and beyond to operate our business.”

As part of the terms of its loan from bondholders, CIT has to get the creditors to approve a restructuring plan by Oct. 1, the company said in the filing. The loan pays 10 percentage points more than the three-month London interbank offered rate, with a 3 percentage-point floor for the borrowing benchmark.

Bondholders providing the financing include Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silver Point Capital LP, people familiar with the deal said yesterday.

Telephone and e-mail messages left with CIT spokesman Curt Ritter weren’t immediately returned.

Stock Falls

CIT declined 30 cents, or 24 percent, to 95 cents as of 12:12 p.m. in composite trading on the New York Stock Exchange. CIT, once the biggest independent commercial finance firm in the U.S., sold for more than $61 a share in February 2007.

CIT has about $10 billion in bonds and loans maturing through 2010, according to data compiled by Bloomberg. The floating-rate notes due in August fell 2 cents to 85.5 cents on the dollar at 12:03 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The cash shortage has forced CIT to cut back its lending. In the quarter ended June, CIT’s loans to small businesses plunged 88 percent to $65.7 million and the company fell to 15th in the category from first a year earlier, according to the La Canada, California-based Coleman Report. CIT finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc.

Customers Draw Down

Since late June, CIT has “experienced a significant increase in the draws” on its financing commitments, which has “significantly degraded the company’s liquidity position,” the lender said in the filing.

The drawdowns exacerbate CIT’s liquidity constraints, said Randy Marshall, a New York-based managing director at Protiviti, a consulting and auditing firm.

“This, combined with the stress from the bondholders and the inability to access the credit markets, is really an extremely difficult situation for an organization that, historically, hasn’t had a big deposit base and relied on the credit markets,” Marshall said.

Effect of Bankruptcy

CIT has said a bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents.

CIT’s bankruptcy warnings are the “elephant in the room,” said Richard Morris, a partner concentrating in workouts and restructuring at Herrick, Feinstein LLP in New York. “These questions and concerns are going to be on the minds of every analyst. From a securities point of view, you have to say this.”

Credit-default swaps protecting against a CIT default for five years climbed 5.5 percentage points to a mid-price of 46 percent upfront, according to broker Phoenix Partners Group. The cost implies that traders have priced in a more than 90 percent chance that the lender will default within the next five years, according to a standard pricing model.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net
Last Updated: July 21, 2009 12:27 EDT

 

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I thought they fixed this problem yesterday????

 

Here comes the end of the day rally again! Buy!

 

NASDAQ up I think 10 days in a row, as for the transports they are down on the day.

AAPL setting the tone for tonight...


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