CIT still has problems

Posted by Ray on August 11, 2009 under Main | Be the First to Comment

It is very convenient to just assume all of the problems that plague the US economy have just disappeared. With all of this talk about the recession easing or ending, as some commentators contend, it is tough to take an objective look at what is going on around us. There is some hope that the recession is ending, I even fall in that camp, but I am more grounded and expect it to last until year end, however there is a higher possibility that CIT Group may still be filing for bankruptcy protection.

Many have assumed that this problem has been fixed, but it has not. The firm recently delayed its quarterly filing and new rumors are forming about a potential bankruptcy in the very near future. Even though the firm has received money from its bondholders it was not enough to make the problems disappear and it is suffering from, as the WSJ put it, a severe liquidity problem.

If CIT fails it, combined with 72 bank failures, a massive increase in personal bankruptcy and pick any other issue of the minute, is evidence of the continuing credit problems that plague or economy. These issues are not exactly systemic risks individually, but combined it is a direct indication of the problems we face. Of course, a great productivity report this morning is sure to make people feel better, even though the report just shows we are squeezing more out of less people.

Our troubles have simply been postponed or buried to a future date and it is my opinion that government intervention is going to prolong our problems, not fix them. No one ever wants to hear, hi, I am from the government and I am here to help, because the government only makes things worse. However, we are closer to the end than we are to the beginning of this thing and we will come out of it, but it is important to recognize the problems that are still there so you do not get sucked in to believing everything is OK right now.

CIT gets funding

Posted by Ray on July 20, 2009 under Main | Be the First to Comment

This is good news mostly because it is not a federal bailout. For the first time a bailout was through private lenders, but it is unclear of what the terms are yet. This is definitely great news, but shows the weakness in the credit markets still. This bailout is after $2.3B from TARP last year which, in my opinion, means that if the firm is not merged it is unlikely that it will still survive long-term unless the credit markets improve dramatically.

Here is the story:

CIT Said to Weigh $3 Billion Bondholder Funding Offer (Update3)

By Pierre Paulden and Linda Shen

July 20 (Bloomberg) — CIT Group Inc., the 101-year-old commercial finance company seeking to ward off bankruptcy, may announce an agreement for $3 billion in financing from bondholders as soon as today, a person briefed on the board’s deliberations said.

The funds would give the New York-based company a chance to restructure its debt outside of bankruptcy, said the person, who declined to be identified because the talks are confidential. The lender’s board accepted the deal late yesterday, the New York Times reported.

CIT needs time to strike deals with bondholders to reduce debt after the U.S. declined to give the firm a second bailout. CIT, which reported $3 billion of losses in the last eight quarters, received a $2.33 billion rescue in December after converting to a bank holding company to be eligible to sell bonds backed by the Federal Deposit Insurance Corp.

“We still think it is a losing effort in the intermediate term although some bondholders may end up better than others with this structure,” said David Hendler, an analyst at CreditSights Inc. in New York. “The wholesale model is dead and creating a branch deposit system from scratch is too expensive for CIT and takes too long to build to help any time soon.”

Barclays Capital is arranging the funding, said another person familiar with the negotiations. The financing will carry an initial rate of about 10.5 percent, the New York Times said. Creditors including Boston-based hedge fund Baupost Group LLC, CapRe, Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silverpoint Partners agreed to provide the money, the Financial Times reported.

Maturing Debt

Chief Executive Officer Jeffrey Peek didn’t return a call seeking comment. CIT shares jumped 83 percent to $1.28 in European trading from their 70-cent close on the New York Stock Exchange on July} 17.

CIT, which has posted losses on home mortgages, student loans and credit to commercial customers, has $1 billion of floating rate notes due next month. The company has $10 billion of debt maturing through next year including a $2.1 billion credit line in April. CIT shares have tumbled 82 percent since June 1.

Earlier, bondholders held calls to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation. CIT finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc.

Pimco, which manages the world’s biggest bond fund, is CIT’s largest bondholder according to regulatory filings. Mark Porterfield, a spokesman for Pimco, didn’t immediately respond to a phone call and an e-mail seeking comment.

Taxpayer Money

Insurers are also among CIT’s largest investors. Aflac Inc., the world’s biggest seller of supplemental insurance, had about $240 million in CIT senior debt at the end of March and Richmond, Virginia-based Genworth Financial Inc. had about $178 million of the notes, Jeffrey Schuman, an analyst with KBW said last week in a report to investors. Insurers may have changed their investments since the end of the first quarter, and portions of the holdings may be protected by hedges, Schuman said.

CIT’s advisers, including JPMorgan Chase & Co. and Morgan Stanley, discussed with other banks about a debtor-in-possession loan to fund the company’s operations should it enter bankruptcy, people with knowledge of the matter said last week.

Meanwhile, bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter. Thomas Lauria, a lawyer at White & Case LLP, said in an e-mail that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy.

FDIC Concern

The demise of CIT, which has almost $76 billion in assets, would represent the largest bank failure by that measure since regulators seized Washington Mutual Inc. in September.

The FDIC, led by Chairman Sheila Bair, was concerned that a U.S.-sponsored rescue, such as backing CIT’s debt, would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

CIT has said its bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents.

Alabama Bankruptcy

CIT accounts for about 70 percent of all short-term U.S. financing known as factoring, worth about $40 billion annually, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey. In factoring, one company purchases another’s accounts receivable.

Moore-Hendley Inc., an Alabama-based company that supplies tools and other items to hardware stores and home centers, became the first to blame CIT for its bankruptcy. The company said in court papers it was forced into Chapter 11 because it had difficulty getting financing from its lender, CIT.

CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents July 17, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net

CIT Group

Posted by Ray on July 16, 2009 under Main | Be the First to Comment

The CIT Group news is weighing on the markets this morning as the Fed’s have decided they will receive no help. There is no systemic impact from the firms failure, but it will cause issues within the banking sector. If you were with CIT Group and have not made alternative funding arrangements then clearly you would be at fault for not knowing the firm was in trouble.

I am pleased there will not be a bailout, firms need to go under to really have a recovery. However, I do feel that this is a test, kind of like how they let Bear Sterns and Lehman go, to see how the markets react. While this may be a test it is seems unlikely that the firm will actually go to bankruptcy court as the government will implement a shotgun marriage of some kind. This is based on testimony from Paulson yesterday who brazenly said that Lewis was threatened to do the deal and he made no apologies.

The question is who would be forced to buy them? I think it would be JP Morgan, US Bank or another large institution. It will be interesting to see how this plays out and the effect it will have on the markets. This also shows the weakness of the banking sector as well and things are not “stellar” as some people believe.

Cit Group

Posted by Ray on July 14, 2009 under Main | Be the First to Comment

We talked about Cit last week and the issues they face moving forward. Clearly the firm is in trouble and as soon as their $2B line of credit is used up they will have to either raise cash or get help from the Fed or government. Geithner said yesterday that he is watching the situation and indicated that the government is in a position to help if need be, well that is what I got out of the comments.

Regardless, we knew their were problems and this should not be a surprise for investors. The big question is should the government intervene? I do not think so at this stage. I know it is painful and investors could loose big time, but it is the way the market needs to sort through those who can survive and those too weak to survive.

We cannot continue to bailout every firm that “needs” it. Frankly, bailing out everyone is not possible and we the people have not received any benefit from these bailouts. Interest rates have increased, minimum payments on credit cards increased, costs for goods and fees have goner dramatically up and we are making less. These bailouts are for business, not the people.

So much for change and hope we were promised by the president.