CIT Rises on Talks With U.S. Regulators About Lender’s Rescue

July 14 (Bloomberg) -- CIT Group Inc. rose in New York trading and the cost to protect its debt against default fell after the lender said it’s in talks with regulators about a rescue.

The lender’s stock jumped 36 cents, or 27 percent, to $1.71 at 9:42 a.m. in New York Stock Exchange composite trading, boosted by CIT’s statement that it was in “active discussions” with regulators about federal aid. CIT has $1 billion of bonds maturing next month, and the firm so far has been unable to persuade the U.S. to back its debt sales. Those talks continued yesterday, said Curt Ritter, a CIT spokesman.

A Wall Street Journal report said that U.S. officials are “in advanced talks” about aid for New York-based CIT, citing unidentified people familiar with the matter.

“They’re on life-support right now,” said David Hendler, an analyst at debt research firm CreditSights Inc. in New York. The financial system is in a “once-in-a-lifetime meltdown” and CIT “went into it in a weakened position,” he said.

Five-year credit-default swaps on the lender declined 4.1 percentage points to 37 percent upfront, according to CMA DataVision. That’s in addition to 5 percent a year, meaning it would cost $3.7 million initially and $500,000 annually to protect $10 million of the company’s debt from default. The upfront cost reached $4.2 million yesterday, CMA data show.

Bond investors had stepped up bets that CIT won’t be able to come up with enough cash in time to honor its debts. CIT’s $1 billion of floating-rate notes maturing in August plummeted 14.375 cents to 80 cents on the dollar yesterday, their worst performance since they were issued three years ago, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Funds Transfer

The Federal Deposit Insurance Corp. is concerned that standing behind CIT’s debt would put taxpayer money at risk because the company’s credit quality is worsening, people familiar with the regulator’s thinking said last week.

While Federal Reserve policy makers aren’t inclined to provide CIT with emergency financing, they are considering the company’s request to allow it to transfer funds from the parent firm into its banking unit, according to an official familiar with the matter. Fed spokeswoman Michelle Smith and FDIC spokesman Andrew Gray declined to comment.

Treasury Secretary Timothy Geithner said yesterday that the government has “the authority and the ability” to address CIT.

“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,” he said at a press conference in London.

Emergency Financing

The Treasury, which has been reluctant to extend further money from the $700 billion Troubled Asset Relief Program, had asked the central bank and FDIC to assess options for helping CIT, the official also said. Meg Reilly, a Treasury spokeswoman in Washington, said the agency declined to comment.

“CIT represents a difficult policy issue for Washington as there is sentiment to punish the fat cats and greed matched by what potential damage could be done against an economy struggling to regain momentum with all of its possible political fallout,” said Scott MacDonald, head of research at Stamford, Connecticut-based Aladdin Capital Management LLC.

Moody’s Investors Service slashed CIT’s credit rating four levels to B3 from Ba2 yesterday and said the ranking may be cut further because of the company’s “inadequate progress” toward improving its liquidity, according to a statement. Standard & Poor’s also lowered CIT’s rating four levels, to CCC+ from BB-, citing requests by CIT borrowers to draw down on credit lines provided by the company.

Banking Failures

A collapse of the company, run by Chairman and Chief Executive Officer Jeffrey Peek, would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, CIT said in internal documents obtained by Bloomberg News.

It would also be the biggest bank failure measured by assets since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.

“There’s no reason that CIT could not have been a much stronger lender than it chose to be, it’s a function of how they conduct their business,” said Sean Egan, president of Egan- Jones Ratings Co. in Haverford, Pennsylvania, in an interview yesterday. “They could have held a lot more capital, they could have levered in a much better fashion.”

CIT funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.

Source: http://www.bloomberg.com/apps/news?pid=20601103&sid=ak7fEvfw4y7E