For CIT, Even A Successful Debt Restructuring May Fall Short
October 02 2009 - 6:13PM
Dow Jones News
CIT Group Inc.'s (CIT) proposed debt structuring plan, even if
successful, may do little to fix the struggling company's broken
lending business.
The aim of the debt exchange is to get bondholders holding about
$31 billion in debt to slash this by at least $5.7 billion and to
extend debt maturities. If a sufficient number of creditors sign
on, this reduction in debt load will help CIT avoid bankruptcy
court, for now. However, it may not help the troubled lender to
grow its way out of its troubles.
CIT's ability to raise funds cheaply - a crucial requirement for
any lender - remains severely limited by low credit ratings and
restrictions imposed by a banking regulator. Unless these hurdles
are removed, the company can do little to revive its lending
business, analysts say. It may be forced to use the breathing room
granted by the restructuring to wind down its loan book and shrink
to a shell of its former self.
"When I look at the company, I don't think they're doing enough
to reduce leverage," says Adam Steer, an analyst at CreditSights
Inc., an independent credit research firm. "There's still a high
risk of bankruptcy down the road, even if the debt exchange is
successful. The best course of action is for CIT to run its
business off."
Steer says CIT needs to reduce its total debt by about $9.3
billion - a far cry from CIT's target minimum of $5.7 billion - in
order to get access to the capital markets. A heftier debt
reduction would also give CIT a better shot at persuading the
Federal Deposit Insurance Corp. to lift restrictions on CIT Bank's
ability to grow deposits.
CIT, a century-old company that is one of the largest lenders to
thousands of small and medium-sized businesses, traditionally has
relied on the capital markets - bonds and short-term debt called
commercial paper - for its funding. In turn, it loaned out these
funds at higher interest rates and pocketed the difference as
income.
The credit freeze, however, shut out CIT and other lenders from
these markets, eliminating this key source of relatively cheap
money.
Deposits are an alternative and stable source of low-cost funds,
but the FDIC has forbidden CIT to increase its deposits because of
concerns around the company's financial well-being. Ultimately,
CIT's fate could depend on its ability to persuade the agency to
allow CIT's bank unit to accept deposits. An FDIC spokesman
declined to comment on the CIT case.
A CIT spokesman also declined to comment. In a regulatory filing
Friday outlining the details of the company's restructuring
efforts, CIT said: "A strong capital position and liquidity profile
should afford CIT the time and resources required to execute on its
broad business restructuring strategy, including refinement of its
business model, liquidation or sale of select businesses or
portfolios, efficiency enhancements and long term bank-centric
funding strategy."
In the second quarter, CIT spent more to raise money than it
could charge its customers in interest, an obviously unsustainable
practice for a lender. CIT's net interest revenue - or the
difference between what it earned from the loans it extended and
its borrowing costs - totaled a negative $19.1 million, compared
with a positive $169.8 million a year earlier.
If CIT's debt exchange is successful, it will lead to "a
stronger balance sheet. [But] right now CIT's business model is
still broken," says Sameer Gokhale, an analyst at Keefe Bruyette
& Woods. "If they don't get help from regulators and the FDIC,
then the best they have achieved, [if the restructuring is
successful], is time for doing an orderly liquidation of the
company."
If the debt exchange offer fails, CIT will seek bankruptcy
protection to reorganize under a prepackaged plan that would offer
creditors less than what the company is now offering. The lender
had warned investors several times over the last few months that it
was seriously considering a bankruptcy filing as a means of
restructuring its debts.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com; and Kate Haywood; 212-416-2218;
kate.haywood@dowjones.com