CIT Plunges 75% After Government Talks Fail

Mukesh Buch
16 Jul, 2009
New York City

CIT, the lender to small businesses and retail trade for more than a century is struggling to negotiate debt workout with its major lender after its negotiations with the government agencies failed. The lender may need more than $4 billion to avoid bankruptcy.

[R]3:40 PM New York – CIT, the lender to small businesses and retail trade for more than a century sis struggling to negotiate debt workout with its major lenders after its negotiations with the various U.S. government agencies failed. The lender may need more than $4 billion to avoid bankruptcy.[/R]

CIT, the lender to small and medium sized businesses is fighting for its survival as it faces significant liquidity crisis.

The one hundred year old lender is facing bond redemption next month and may need between $4 billion and $6 billion to avoid credit default according to reports in the Wall Street Journal and Bloomberg News.

The discussion with the government broke-off yesterday and this morning CIT said on its Web site that “there is no appreciable likelihood of additional government support being provided over the near term.”

CIT has been active in lending to businesses in retail trade and apparel manufacturing and distribution business. The factoring services of the company are widely recognized in the retail industry.

CIT, long dependent on the capital market for its resources has not been able to raise capital to fund its losses and need of providing financing to its customers.

Rating agencies downgraded CIT debt in April on the worries that the business is deteriorating.

CIT was granted bank status in December and given $2.3 billion under the Fed program and has been in negotiations with the FDIC to access additional funds under debt guarantees program. Those negotiations ended yesterday forcing the lender to give one-day notice to its existing lenders.

CIT at the end of December 2008 reported tier 1 capital ratio of 9.4% and 9.3% at the end of March 2009.

However, the allowance for loan losses jumped from $575 million in 2007 to $1.1 billion in 2008 and $1.3 billion at the end of the first quarter in March 2009.

The lender under the leadership of Jeffrey Peek pushed hard in student loans and sub-prime mortgages which exploded in late 2007 and early 2008.

According to the latest SEC filings, the company has a portfolio of $50 billion in educational loans.

The lender is seeking to swap some of its debts for equity or sell secured interests in assets or may be forced to file bankruptcy protection.

Many borrowers and small businesses rushed to borrow on the credit lines issued by the lender after they heard that the company is facing financial difficulties and that put more financial stress on the lender.

If CIT does file chapter 11 protection, it will be the first entity to fail under the government lending programs.

CIT ((CIT)) stock plunged 75% to 40 cents in the late afternoon trading and its debt fell sharply.

The troubled lender has $78 billion in assets and $61 billion in long term borrowing and is facing $1 billion in debt repayment next month and has reported losses in the last nine quarters in a row.

CIT reported its first annual loss after reporting profits dating back to 1996 according to the annual earnings available on 123jump.com.