CIT Debt Reduction Plan May Not Be Enough

CIT Group hopes to fix its balance sheet and turn itself around, but its plan may not save the company even if it can be executed.

The troubled lender to small and mid-sized companies, including many owned by buyout shops, launched a debt-exchange offer at the beginning of October in which it aims to reduce debt by at least $5.7 billion and avoid filing for bankruptcy. But for a company with $71 billion of assets supported by less than $3 billion of equity, that may not be enough extra capital, analysts said.

“We question whether CIT is improving its profile enough,” analysts at CreditSights said in a report dated Oct. 2. The reduced debt may appease regulators at the Federal Reserve, but would not likely allow the company to fund itself in the corporate bond market or achieve investment grade credit ratings, the report said.

Prior to the market’s collapse last year, CIT, which provides loans ranging from $20 million to $1 billion, was a pillar amid the mid-market LBO universe. According to Thomson Reuters LPC, the lender has provided capital to at least 175 sponsor-backed companies in the last three years.

CIT converted to a bank holding company in the fourth quarter of 2008 to qualify for U.S. government funds. In June, troubles became apparent when Standard & Poor’s cut its credit rating to junk status saying the commercial lender’s conversion to a bank holding company did not benefit its liquidity as much as expected. In July, shares of CIT tanked following the government’s decision not to provide bailout funds to the embattled lender.

Time is of the essence. The longer it takes CIT to turnaround, the harder it will be to wring the maximum return possible from its assets, and to win new business. The plan CIT has put forward, however, could take a long time to complete: The company hopes to fix its balance sheet, and then fund new business out of its bank 12 to 18 months later, an eternity in the financial world.

“In the meantime what happens in a plan like this is the balance sheet deteriorates,” said Ricardo Kleinbaum, trading sector specialist at BNP Paribas in New York.

Even executing the exchange could be difficult. The unsecured borrowers can swap their debt for new secured obligations. That puts them in a better spot than they are in now, but they will still be in a worse spot than the funds that gave the company a $3 billion loan over the summer, who have the first claim on a large pool of assets, noted Kevin Starke, senior analyst at CRT Capital Group.

Those lenders may increase the size of their loan, too, leaving less collateral for other bondholders. CIT said that holders of about $10 billion in debt have already indicated they will participate in the exchange or vote for the prepackaged bankruptcy.

“They need much more support than that,” Starke said. If the company does not receive enough interest in its debt exchange, it hopes to get enough support for a prepackaged bankruptcy, which requires less support to go through.

CIT is attempting to lure its short-term bondholders into participating in the exchange by offering a higher portion of new secured debt than it is offering longer-term debt holders. “Whether this goes through it will depend on the mix of holdings, and the front end versus the long end, and there are a lot of people with CDS that may have an interest in this not going through,” BNP Paribas’s Kleinbaum said.