By Erik Holm and Shannon D. Harrington
March 20, 2008 (Update3)
SourceMarch 20 (Bloomberg) -- CIT Group Inc. shares and bonds plunged after the largest independent U.S. commercial finance company fell victim to the freeze in short-term debt markets.
The company drew on its entire $7.3 billion of emergency credit lines today after ratings downgrades left it unable to finance itself with commercial paper, or debt due in nine months or less. Chief Executive Officer Jeffrey Peek said the ``protracted disruption'' in capital markets may also force the New York-based company to sell assets. CIT has started seeking a ``strategic funding partner'' he said on a conference call.
CIT's decision to tap financing shows the credit crunch that claimed Bear Stearns Cos. and Countrywide Financial Corp. is deepening as investors shrug off efforts by the Federal Reserve to encourage them to lend. CIT, which leases airplanes and trains and provides financing to companies, has $2.8 billion of commercial paper due this year and $8.2 billion of other debt.
``Once you tap your backup bank lines and the credit crunch is still as bad as it is, you're on a slippery slope'' with credit ratings companies, said Richard Hofmann, an analyst at CreditSights Inc. in New York.
CIT fell as much as 45 percent in New York Stock Exchange composite trading, the biggest drop in almost six years. The stock, which resumed trading after a halt, plunged $2.01 to $9.63, and earlier traded as low as $5.19.
Bonds Drop
The company's $500 million of 5.6 percent notes due in 2011 slumped to as low as 66.5 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service. The notes last traded at 93 cents on the dollar on Feb. 26. The yield widened to 16.4 percentage points more than Treasuries with similar maturities, from 4.7 percentage points.
``What's driven them to the brink here is funding markets shutting off to them,'' Hofmann said. ``They just are not able to do unsecured issuance right now where their spreads are.''
CIT depends on short-term financing for its day-to-day operations. The company has traditionally financed itself through unsecured debt markets such as commercial paper or bonds. The slump in credit markets has made that more difficult and CIT has borrowed using 30 percent of its assets such as loans and leases as collateral, according to S&P.
CIT was charged fees as low as 8.5 basis points for access to the credit lines, according to Bloomberg data. They are now paying about 50 basis points above the London interbank offered rate, or 3.1 percent. Senior unsecured notes due in 13 months traded today at 3,466 basis points, or 34.7 percentage points, over Treasuries, Trace data show.
CIT's access to financing narrowed this week after Moody's Investors Service and Standard & Poor's cut the company's credit ratings.
Ratings Cut
S&P cut CIT's short-term rating one level on March 17 to A-2 from A-1 and the long-term rating to A- from A. Moody's cut its short-term rating on CIT one level to Prime-2 from Prime-1 and lowered the long-term ratings to A3, its fourth level of investment grade, from A2. The ratings firm said it may cut the long-term ratings further.
Fitch Ratings yesterday said CIT may have needed to tap its backup credit because its access to unsecured short-term debt had become ``materially constrained.'' The firm said it may also reduce CIT's ratings.
CIT posted a $123.2 million loss before preferred dividends last quarter because of bad mortgages and the declining value of its student-loan business. Peek stopped originating home mortgages last year to focus on providing loans and advisory services to mid-sized companies. In January, CIT said it will cut its workforce this year by 5 percent, or about 330 jobs, after a 4.4 percent reduction in the fourth quarter.
`Challenging'
CIT joins companies from Sprint Nextel Corp. and MGIC Investment Corp. in tapping their bank credit lines to ensure they have access to financing. The scramble for credit comes at the worst possible time for the banks, which are reining in lending after $195 billion in writedowns and losses on mortgage- related debt since the beginning of last year.
Banks including Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Barclays Plc gave CIT four separate credit lines, according to regulatory filings last month. The lines are typically given as back up credit in case a company can't finance itself in other markets such as commercial paper.
Once a company draws on the lines, banks are required to set aside capital to cushion themselves against potential losses.
Default Swaps
Credit-default swaps tied to CIT's bonds traded as high as 27 percent upfront and 5 percent a year today, according to broker Phoenix Partners Group in New York, meaning it cost $2.7 million initially and $500,000 a year to protect $10 million in bonds for five years. That's up from 23 percent upfront and 5 percent a year yesterday.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
CIT isn't likely to be the next Bear Stearns, which was forced to sell itself this week to JPMorgan Chase & Co. for $2-a- share after a cash drain threatened to push the company into bankruptcy, Hofmann said.
``It's not like a Bear Stearns where overnight you're out of cash,'' Hofmann said. ``It's a different business model where the maturities are spaced out over time and you still have income coming in.''
The company should have enough funding for at least the next two quarters, said David Chiaverini, an analyst at Bank of Montreal's BMO Capital Markets division in New York, who rates the shares ``market perform.''
`Liquidity Crunches'
Peek, who had been in the running to be president of Merrill Lynch & Co. before losing a power struggle in 2001, joined CIT in 2003 as chief operating officer. He took over as CEO in 2004.
CIT, founded in 1908 as the Commercial Credit and Investment Co., was the first to offer financing to help people buy Studebaker cars. The company spent a year as a unit of Tyco International Ltd., which paid $9.5 billion to buy CIT in March 2001.
``In this market, you can have names with fundamentally good business models that are suffering severe liquidity crunches,'' said John Guarnera, an analyst at Bank of America in Charlotte, North Carolina. The analyst lowered his recommendation on the debt to ``neutral'' from ``buy'' on March 11.
To contact the reporters on this story: Erik Holm in New York at
eholm2@bloomberg.net; Shannon D. Harrington in New York at
sharrington6@bloomberg.net;
Last Updated: March 20, 2008 16:44 EDT