CIT Group Preparing for Bankruptcy Filing

[ElCount]

Major Lender Faces Crunch
CIT Hires Bankruptcy Adviser as Payment Looms; Financier to 1 Million Businesses

By JEFFREY MCCRACKEN and SERENA NG

CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.

To prepare for a possible filing, CIT has retained the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, which has a prominent bankruptcy practice, these people said.

The mere hiring of bankruptcy counsel doesn't mean a company will actually make a bankruptcy filing. CIT has been pressing its case "with increased urgency to the government," said a person familiar with the matter, and is hopeful because "the government has not said absolutely no to anything."


CIT has a $1 billion payment due in mid-August and it is unclear the company "will be able to handle that," said this person. The company will give more guidance when it discusses second quarter earnings in two weeks.

CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.

CIT is registered as a bank holding company and has a bank in Utah with roughly $3.5 billion in deposits. But to get most of its funds to lend, it has historically relied on bonds and the short-term debt market known as commercial paper. It has been largely unable to tap the credit markets since mid 2007 and is trying to raise more money through its bank.

The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or "junk," credit rating, to sell bonds at a low interest rate.

CIT confirmed Friday that the Federal Deposit Insurance Corp., which oversees the debt guarantee program, has yet to approve its application. CIT said that its application to the FDIC remains outstanding and the company "continues to be in active dialogue with the government."

A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners and clothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.

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CIT Group headquarters in New York. Bonds and shares of the lender tumbled Friday amid its failure so far to win a federal debt guarantee.
On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.

The company's most pressing issue, said those familiar with the situation, is that it has a debt payment coming due in August. In all, CIT has about $2.7 billion that comes due this year and $8 billion more due next year.

The FDIC has been considering CIT's application for a federal debt guarantee since January and hasn't reached a decision. The agency is concerned about CIT's deteriorating financial position and operating losses.

A few months ago, CIT hired former Deputy Treasury Secretary Roger Altman and his boutique investment bank Evercore Partners to try to get more TARP funds or find another financial solution with the government, said the people familiar with the matter.

One problem with getting more aid is that the government has made it clear it doesn't see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.

Meanwhile, competitors like GE Capital Corp. and GMAC LLC have been able to sell debt with the backing of the government's top credit rating.

According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.

CIT competes with the likes of Wells Fargo, Bank of America, General Electric Capital Corp. and regional banks in the sectors in which it is active. But many CIT customers say that the lender is often willing to make loans to businesses and borrowers that most banks typically shun. CIT now ranks 20th among U.S. bank holding companies, with assets of over $75 billion.

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Heard on the Street: CIT Offers Litmus Test for Washington's Faith in the System
Founded in 1908, CIT, which used to be known as Commercial Investment Trust, has had a somewhat tumultuous history, its fortunes rising and falling during past credit cycles. In the 1990s it expanded into areas such as manufactured housing and financing technology equipment, only to get burned when those bubbles burst.

In 2001, following the dot-com bust, the company was acquired by Tyco International Ltd. , but was spun off in mid-2002 when Tyco became ensnared in an accounting scandal.

In 2003, CIT appointed its current chairman and chief executive, Jeffrey Peek, a former Merrill Lynch executive. Under his leadership, it expanded consumer-finance activities such as student lending. It also increased its presence in subprime mortgage lending during the credit boom.

When the credit crunch hit, the company rushed to leave those two businesses, concentrating instead on lending to small businesses and midsize companies, leasing railcars and providing cash advances to manufacturers and companies in exchange for their receivables.

"They are our sole financing partner and we are heavily reliant on them," said Haresh Tharani, founder and president of the Tharanco Group, a company in the apparel business.

Tharanco has a loan from CIT and also gets cash advances from the lender for its receivables. "I worry about the company.... If CIT fails, it would be detrimental to the confidence of many businesses," Mr. Tharani said.

Write to Jeffrey McCracken at jeff.mccracken@wsj.com and Serena Ng at serena.ng@wsj.com

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[ElCount]

FINANCING JULY 14, 2009
U.S. in Talks to Rescue CIT
Regulators Split Over Providing FDIC Debt Backing to Lender; Deal Is Uncertain
By DAMIAN PALETTA and SERENA NG

WASHINGTON -- U.S. government officials are in advanced talks about providing some sort of aid to CIT Group Inc., one of the country's primary lenders to small and midsize businesses, people familiar with the matter said.

The discussions are fluid. It remains unclear whether a final deal can be brokered and, if so, how expansive it might be.

CIT has been battered by heavy losses, but so far, regulators haven't deemed its problems big enough to pose a threat to the broader financial system. Government officials are worried, however, about unforeseen consequences that a CIT collapse could trigger. The Obama administration has struggled to launch a program to spur lending to smaller companies, a business in which CIT is a key player, with loans to nearly a million customers.

One possible source of aid would be a Federal Deposit Insurance Corp. program that guarantees newly issued debt. CIT has been seeking for months to take advantage of this program, but the FDIC has been reluctant to let it, because of CIT's financial weakness. The Treasury Department and the Federal Reserve are more supportive of such a move, said several people familiar with the process. It remained unclear Monday whether the FDIC would soften its position and let CIT issue federally guaranteed debt.

Government officials are also considering other steps, including a regulatory waiver that could make it easier for CIT to pass assets from its parent company to its bank division, as well as a separate way to borrow from various government programs.

The Wall Street Journal reported Saturday that CIT had hired a bankruptcy adviser and was considering a bankruptcy filing. CIT said late Sunday that it remained in "active discussions" with regulators and the government on ways to improve its cash position.

CIT received $2.33 billion from the Treasury's Troubled Asset Relief Program in December. It isn't seeking more TARP funds, said someone familiar with the matter.

Treasury Secretary Timothy Geithner said Monday he was "actually pretty confident" that "we have the authority and the ability to make sensible choices" in the situation. Speaking in London, Mr. Geithner said, "We're watching closely developments in those markets." He added: "We have a significant interest generally in trying to make sure the financial system gets through this, adjusts where it needs to adjust and emerges stronger."

Mixed messages from Washington and the company in recent days led some investors to believe the government was preparing to let the lender file for bankruptcy. On Monday, the cost to insure CIT bonds against a default soared, and its shares declined 18 cents, or 12%, to $1.35. In after-hours trading, as the news of potential government help emerged, CIT shares jumped 29 cents to $1.64.

"It seems like official Washington is just coming to grips with what would happen if the largest small-business lender went belly up," said Jaret Seiberg, a policy analyst at Concept Capital's Washington Research Group. "It would destroy Democratic hopes of getting unemployment under control before the mid-term election."

CIT historically has relied heavily on capital markets for funding, such as borrowing in short-term debt markets, and many of those markets remain inhospitable to the firm. While CIT has tried to ratchet up deposits at its Utah-based bank, including taking in $700 million in the first quarter, some analysts say that strategy shift isn't likely to happen quickly enough to allow the lender to survive the crisis without additional support.

Moody's Investors Service analysts issued a report on Monday saying CIT will need some sort of capital injection, either from the government or private investors. Most deep-pocketed companies and investors are wary of pumping money into a troubled company on short notice.

Founded in 1908, CIT focused on lending to businesses snubbed by traditional lenders. In 2004, the company revved up its lending and expanded into areas such as subprime mortgages and student lending, which saddled it with large losses.

CIT's troubles deepened in the spring of 2008 when credit-ratings firms began downgrading its debt, further limiting its financing options. Delinquencies and bankruptcies of CIT customers hurt by the recession also began to mount. Customers including Eddie Bauer Holdings Inc., Filene's Basement and Kainos Partners, a franchisee of Dunkin' Donuts outlets, have filed for bankruptcy protection this year.

CIT executives thought they had resolved their problems in December when CIT was approved to become a bank holding company and received TARP money. They hadn't counted on running into resistance at the FDIC. Now, the company faces having to repay $2.7 billion of debt that matures by the end of the year, half of which comes due by September.

Earlier this year, the FDIC was hesitant to allow another struggling lender, GMAC, to participate in the guarantee program, called the Temporary Liquidity Guarantee Program. The FDIC relented amid pressure to produce a broad rescue package for the auto business.

FDIC officials view credit quality as a key factor in whether they allow certain companies to participate in the program, and this has been one of their main concerns with CIT, in addition to worries about high operating losses.

The differences among government agencies echo past clashes between the FDIC and the Treasury over aid to specific companies during the height of the financial crisis last fall, driven in part by their different mandates. FDIC officials often look at the potential cost of an intervention to the agency, which has to insure deposits at thousands of banks. Treasury and Fed officials have pushed the FDIC to look at predicaments more broadly and consider risks to the financial system and the economy.

The FDIC set up the debt-guarantee program last fall to help banks and bank holding companies gain access to funds. The FDIC has discretion over which new banks or holding companies get the backing. So far, the agency hasn't lost any money on the guarantees, and it has collected billions of dollars in fees from the banks it aided.

The debt-guarantee program is set to expire later this year, so new debt must be issued by Oct. 31 to qualify. There was roughly $336 billion in FDIC-backed debt outstanding at the end of March, issued by close to 100 companies.

CIT poses a difficult challenge for the Obama administration, in that its collapse might not roil financial markets, but it could place strain on hundreds of thousands of corporate borrowers that are having a hard time finding credit.

Write to Damian Paletta at damian.paletta@wsj.com and Serena Ng at serena.ng@wsj.com

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[ElCount]

JULY 15, 2009, 4:24 P.M. ET
Trading in CIT Is Halted as U.S. Works on Aid Plan
A WSJ NEWS ROUNDUP

The U.S. government plans to find a resolution to the liquidity crisis at lender CIT Group Inc. within 24 hours, a person familiar with the government's thinking said.

Trading in CIT shares was halted midafternoon Wednesday in New York. The stock was up 1.9%, or three cents, at $1.64, after trading as low as $1.50. Trading is often stopped when a company is about to announce market-moving news.

A White House spokesman said President Barack Obama has received a briefing on the situation at CIT and that the Treasury Department is monitoring the company "minute by minute."

CIT and U.S. regulators spent Tuesday night discussing details of a potential aid package after customers drained hundreds of millions of dollars from the lender, according to people familiar with the matter.

"I've spoken with [Treasury] Secretary [Timothy] Geithner, and I understand they're working hard to try to come up with something responsible to try to prevent the failure," Rep. Barney Frank (D., Mass.) said before the latest news of the aid package surfaced.

If CIT is allowed to fail, "I think there would be a great deal of harm to the overall economy," Mr. Frank said.

Before news emerged that an aid package could come within a day, the cost of protecting $10 million of CIT's senior bonds against default for five years rose to $3.5 million upfront plus a $500,000 annual fee. Early Wednesday, the cost was $3.25 million plus $500,000 a year.

An outline of the plan began to emerge Tuesday as CIT's liquidity crisis worsened.

News over the weekend that the company, which is a lender to almost one million small and midsize businesses, hired lawyers to help prepare for a possible bankruptcy filing prompted customers to draw down on credit lines Monday and Tuesday. People familiar with the matter put the drawdowns at several hundred million dollars.

Under the potential plan, regulators would allow CIT to transfer assets from its holding company to its bank in Utah; the Federal Reserve would let CIT pledge some of those assets at its discount window and the company would take steps to refinance some of its existing debt.

While CIT customers recently had as much as $3.9 billion in undrawn revolving credit lines, it is unlikely that whole amount can be drawn down in the near term because many of the credit agreements require borrowers to put up collateral against the loan.

Discussions over the government's approach to CIT have exposed many of the fault lines that widened during the financial crisis last year. Government officials have been split over how much help CIT should be offered; some feel CIT could be trying to overhype the consequences of its potential collapse to scare Washington into action.

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[ElCount]

JULY 16, 2009
Regulators Near Deal on Package to Save CIT
By SERENA NG, JEFFREY MCCRACKEN and DAMIAN PALETTA

CIT Group Inc. and federal regulators were working to iron out details of an aid package Tuesday night after customers drained hundreds of millions of dollars from the lender, according to people familiar with the matter.

An outline of the plan began to emerge Tuesday as CIT's liquidity crisis worsened. Corporate customers drew down on their credit lines Monday and Tuesday.

People familiar with the matter put the drawdowns at several hundred million dollars; one said a number discussed by the board ran as high as $775 million. That placed an added strain on the cash-strapped company and increased the urgency for a resolution.

Under the plan, regulators would allow CIT to transfer assets from its holding company to its bank in Utah; the Federal Reserve would let CIT pledge some of those assets at its discount window and the company would take steps to refinance some of its existing debt. The package isn't yet finalized and it remains uncertain whether a deal can be struck.

CIT's board, which has been meeting regularly in the past few days, met again late Tuesday with the hope of coming to a solution soon, said one person familiar with the matter.

It is unclear what role CIT Chief Executive Jeffrey Peek would have if a deal is reached involving the government, the person said.

The financial position of CIT, a lender to almost a million small and midsize businesses, has weakened in recent days and government officials have come under increasing pressure to find a solution.

News over the weekend that the company hired lawyers to help prepare for a possible bankruptcy filing prompted customers to draw down on credit lines and the company's bonds and stock slumped.

While CIT customers recently had as much as $3.9 billion in undrawn revolvers, it is unlikely that whole amount can be drawn down in the near term because many of the credit agreements require borrowers to put up collateral against the loan or meet certain financial-performance standards known as covenants.

Shares of CITrose 26 cents to $1.61 on Tuesday as it became clear that at least some arms of the government would offer assistance to the company.

White and Case LLP attorney Thomas Lauria said Tuesday that he is trying to organize CIT bondholders.

"This is a very unpredictable situation with a lot of volatility and uncertainty on how it will impact investors," said Mr. Lauria. The group includes Pacific Management Investment Co. and Loomis Sayles & Co., according to a banker familiar with the matter. Analysts expect CIT to offer to exchange some existing debt for new securities with better claims over the company's assets.

Discussions over the government's approach to CIT have exposed many of the fault lines that widened during the financial crisis last year and come at an awkward time for regulators. Government officials have tried to pivot their attention to focus on broader industry clean up instead of reverting to one-off rescues of flailing companies.

Government officials remain split over how much help CIT should be offered and some feel that CIT could be trying to overhype the consequences of its potential collapse to scare Washington into action.

There is also the risk that propping up CIT will reinforce the stigma that Washington will bail out companies that aren't even considered too big to fail.

Still, officials know they face unknown ramifications if the company does collapse, and the economy is still in weak enough shape that it is unclear whether they are willing to take that risk.

The asset transfers to CIT's bank would require approvals from the Fed and the Federal Deposit Insurance Corp.

The FDIC remains reluctant to give CIT access to a temporary program that allows banks and thrifts to issue debt with government backing.

CIT late last year received approval to convert to a bank holding company and received $2.33 billion from the Treasury under the Troubled Asset Relief Program.

One likely concern for regulators is how CIT can fund a steep rise in assets at its Utah bank. Part of the company's strategy is to aggressively seek out deposits through brokers, but the FDIC traditionally views such moves as higher risk, especially at companies that are struggling.

It is unclear if the FDIC will sign off on such a strategy.

Write to Serena Ng at serena.ng@wsj.com, Jeffrey McCracken at jeff.mccracken@wsj.com and Damian Paletta at damian.paletta@wsj.com

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[ElCount]

JULY 16, 2009
CIT Rescue Talks Collapse
Impact on Small Firms Feared if Lender Fails; Stress Test Finds Need for $4 Billion
By DAMIAN PALETTA, SERENA NG and JEFFREY MCCRACKEN

Ailing business lender CIT Group Inc. said Wednesday "there is no appreciable likelihood" it will receive fresh government support in the near future, marking the first time since the collapse of Lehman Brothers that the U.S. has declined to aid a struggling financial company of significant scope and size.

What happens next will be a major test of whether the financial system and economy are sufficiently healed to absorb CIT's problems.

The company is a source of funding for thousands of small and midsize businesses. It's also a big player providing cash advances to clothing manufacturers and suppliers, and credit to retailers to pay off invoices. The impact could be especially acute in California because of the state's large apparel-import business.

CIT representatives scrambled Wednesday night to line up at least $2 billion in rescue financing from existing debtholders, according to people familiar with the matter. CIT has given the debtholders 24 hours to decide if they will come up with new cash. The company indicated to investors that without the rescue financing, it would likely have to file for bankruptcy protection as more borrowers draw down credit lines, these people said.

In its written statement, issued after the market's close, CIT said it was "evaluating alternatives."

The collapse of the government talks appears to be rooted in CIT's worsening financial situation and disagreements among regulators as to the best way to proceed.

The Federal Reserve conducted a stress test on CIT Tuesday night, much like the ones performed on the nation's largest financial institutions earlier this year. The test found the company would need $4 billion to cover losses under the most stressed economic conditions, people familiar with the matter said.

Government officials suggested they could offer a bridge loan if CIT could convince policy makers it had a solid restructuring plan in place, these people said. Government officials also considered injecting more money into CIT under the Troubled Asset Relief Program, but it is unclear under what conditions. Those talks broke down Wednesday afternoon.

U.S. officials ultimately decided CIT's problems were too severe to be solved by any of the plans under review, said a Treasury spokeswoman. Government officials didn't want to pump more money into the company because it didn't seem to have a viable business plan, she said.

Whatever the eventual outcome, Treasury officials believe they will have lost their entire $2.3 billion investment in CIT, made last year under TARP, the spokeswoman said. That would be the first acknowledged loss of public money injected into financial companies.

The fate of CIT has posed a dilemma for the Obama administration and a test for its stance on bailouts. CIT is much smaller than other firms that received exceptional government assistance, such as Citigroup Inc. and American International Group Inc. Many Washington officials felt it was the type of company that should be allowed to fail.

But its role as a key lender to small businesses, combined with heightened concerns about unemployment, put government officials at odds over how to respond. Some officials worried about being seen to aid big firms while ignoring one that was billing itself as vital to the health of small businesses across the country.

White House Chief of Staff Rahm Emanuel suggested that the decision to cut off CIT is a turning point in the government's financial-industry rescue. "Given the sense of calm, it is a symbol of a different phase," he said.

But the news was unsettling to some businesses. "In a time when the U.S. apparel and footwear industry is experiencing the most gripping credit crunch in memory, I fear this may only further hinder any opportunity for economic recovery," said Kevin Burke, chief executive of the American Apparel & Footwear Association.

Nick Vojnovic, president of Tampa, Fla.-based FSC Franchise Co., said he is now rethinking expansion plans for his family sports-pub chain, Beef 'O' Brady's, which has some 270 pubs across the country, after CIT stopped making new loans to his franchisees last year.

"It's been extremely difficult with them pulling back, and there's no sense that things are loosening up," he said. "If you're trying to raise money to build a restaurant right now, it's virtually impossible."

One possibility raised by analysts and others is that CIT's struggles could spook investors and counterparties in one of its biggest competitors, General Electric Co., which would potentially represent a more complex problem for the government. GE declined to comment.

In a written statement, a Treasury spokeswoman suggested CIT, run by Chief Executive Officer Jeffrey Peek, didn't meet the bar for getting emergency aid.

"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," the statement said.

It added that the administration has "a comprehensive and aggressive strategy to restore stability to the financial system as a whole so that credit flows to both businesses and consumers and puts us on a path to sustainable growth."

Treasury officials said they believe CIT's problems won't have as big an impact as some fear because the company had already slowed its lending. Others appear willing to step up and make more loans to small businesses, they said.

In December, the Federal Reserve allowed New York-based CIT to become a bank-holding company, enabling the Treasury to simultaneously pump $2.3 billion of public money into the firm.

But CIT continued to struggle under the limitations of its business model and the woes of its customers in hard-hit areas such as retail, media and commercial real estate, including retailers Eddie Bauer and Filene's Basement, which both sought bankruptcy-court protection.

CIT had relied heavily on funding from capital markets, which have been closed to the lender for the past two years as its credit ratings fell into junk territory. CIT has posted net losses for eight consecutive quarters, and has said it doesn't expect to return to profitability until 2010 at the earliest. It hasn't been able to secure retail deposits fast enough to make up the difference.

Its most recent troubles were prompted by the Federal Deposit Insurance Corp., which balked at requests to guarantee the firm's debt. CIT had been banking on that program for its short-term survival.

"CIT needs a massive deleveraging, which would save the company, provide better returns for its unsecured creditors, and certainly be better for the economy and the country," said Jeffrey Werbalowsky, CEO of investment bank Houlihan Lokey, which advised GM and Lehman Brothers bondholders and is pushing to represent CIT bondholders.

Talks with the government were complicated by conflicting signals over who was leading them. Some say Treasury officials were in charge, others say the Federal Reserve headed the talks, while still others say that the main focus was on decisions at the FDIC.

"There are no clear lines of authority about who should do this," said Brian Gardner, an analyst at Keefe, Bruyette & Woods. "You have different programs and different authorities, and there is not a clear delineation of who should be dealing with CIT."

Customers, alarmed by news that CIT was preparing for a possible bankruptcy, rushed to draw down on credit lines this week, draining hundred of millions of dollars from the lender and deepening its liquidity crisis.

A review of CIT's loans by Foresight Analytics on behalf of The Wall Street Journal found that CIT's overall delinquency rate was 4.7%, compared with an average of 2.8% for other U.S. lenders. Foresight Analytics, an Oakland, Calif., financial-research firm, analyzed the company's first-quarter filings, and the economy has only worsened since then.

The Obama administration is trying to rework regulation of financial markets to tackle the matter of companies operating on the margins of finance with no clear regulatory supervision.

That framework hasn't been approved by Congress, which means CIT's problems caught government officials flat-footed.

Regulators thought they had moved past the ad hoc rescues that led to near-chaos last fall, and see their current task as cleaning up the problems. The unknown impact of a CIT collapse, however, gave some observers pause.

"If I were at the Fed or Treasury, I would think about: Will we spook the markets if we let this one go?" said Bill Isaac, former chairman of the FDIC. "It's not a time for philosophy. It's a time to be practical."

—Michael Corkery, Jonathan Weisman and Paul Glader contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com, Serena Ng at serena.ng@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com

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[ooDoe aka Doe Boy]

Good and informative