Caroline Salas and Pierre Paulden report at Bloomberg that CIT Group Inc., the century-old lender to 950,000 businesses and a lender to the Dunkin Donuts franchise owner community for 50 years, is trading in the bond market as if it may fail.
Since becoming a bank in December to qualify for federal help, CIT has lost all three of its investment-grade ratings. Yields on its bonds are comparable to securities rated on the brink of default on concern CIT won’t get approval to sell U.S.- backed bonds under the Temporary Liquidity Guarantee Program to refinance $10 billion of debt coming due through next year.
“They won’t be able to survive” without cheap funding, said Jason Brady, a managing director at Thornburg Investment Management, which manages $40 billion, including CIT bonds, in Santa Fe, New Mexico. “The fact that their access to TLGP has been delayed so long is a bad sign.”
A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. The New York-based lender, run by Chief Executive Officer Jeffrey Peek, says it is still discussing its TLGP application with regulators. CIT hasn’t had access to the corporate bond market in more than a year, while the government allowed competitors from General Electric Co. to GMAC Inc. to sell U.S.-backed debt during the worst credit crisis since the Great Depression.
“We don’t have any clear criteria for who’s in and who’s out and which lines of business, like autos, are good, or which are not so good — like the kind of asset-based lending that CIT has done,” said Karen Petrou, managing partner of Washington- based research firm Federal Financial Analytics Inc.
Subprime, Student Loans
CIT, founded in 1908 as Commercial Credit and Investment Co., reported lossestotaling more than $3 billion in the past eight quarters after expanding into subprime mortgages and student loans.
The lender, which says it was the first to offer credit to help consumers nationwide buy Studebaker cars, funds businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. CIT says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.
The U.S. spent, lent or pledged $12.8 trillion through March to revive the economy, according to data compiled by Bloomberg. Insurer American International Group Inc., based in New York, got taxpayer funds in September in a bailout that has swelled to $182.5 billion. New York-based Citigroup Inc., the third-biggest U.S. bank by assets, has received $45 billion from the government.
CIT may have to seek a buyer if the government doesn’t see the company as critical to the economy and withholds access to the TLGP, said Matthew Eagan, investment manager at Loomis Sayles & Co. in Boston.
“Maybe the government doesn’t think they’re big enough,” said Eagan, whose firm manages $98 billion in fixed-income assets, including CIT bonds. “If CIT went away, I don’t think it fits into that category where the government would defend it.”
Even after the Treasury made a $2.33 billion investment in CIT in December, requiring it to sell preferred shares and warrants to the government to help avert a failure, the Federal Deposit Insurance Corp. hasn’t agreed to support the business by guaranteeing its debt.
“It beats me,” Petrou said.
David Barr, an FDIC spokesman in Washington, declined to comment on CIT’s pending application.
Treasury spokeswoman Jenni Engebretsen didn’t return calls for comment.
Fitch Cuts Debt
CIT’s “application for participation in TLGP remains outstanding, and we continue to be in active dialogue with the applicable federal regulators,” CIT spokesman Curt Ritter said.
The company can probably meet its debt obligations until next April, when $2.1 billion of its credit line comes due, said Vincent Arscott, an analyst at Fitch Ratings in New York.
Fitch slashed CIT to junk in April, then lowered the lender’s rating again on June 1 to BB and cut it to B+ yesterday. Moody’s Investors Service cut CIT three levels to Ba2 from Baa2 on April 24. Standard & Poor’s downgraded CIT three grades to BB- on June 12.
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.
Its bonds tumbled 9.5 percent in June, the third-worst performance among the 50 biggest high-yield issuers, Merrill Lynch & Co. index data show. The average junk bond rose 3.2 percent last month and is up a record 30 percent in 2009.
The stock has plunged 61 percent this year, underperforming the Russell 1000 Financial Services Index by 51 percentage points. Its market value has fallen below $700 million.
CIT needs the FDIC program to issue debt at below-market rates and improve the profit margins on its loans, Eagan said. Its borrowing costs exceeded interest income in the first quarter by $17.5 million. The bank said in April that it may lose money until 2010 as more borrowers miss payments.
“The key to this company is to get access to cheap costs of funding; TLGP was supposed to be the bridge to get there,” Eagan said. “If they don’t have access to the unsecured markets, do they have a viable business? It’s an open question.”
Peek, a former Merrill Lynch investment banker who joined the company in September 2003, said on a conference call in April that CIT will use cash on hand and credit line availability to repay debt. The CEO wasn’t available for comment, Ritter said. The company faces more than $2.4 billion in maturities this year and about $8 billion in 2010, according to Bloomberg data.
CIT may also package some assets into bonds and has “enhanced” its cash by transferring others to its bank, said Peek, 62, who spent 18 years at Merrill before he was passed over in 2001 to replace CEO David Komansky.
The lender’s $750 million of 5.6 percent notes maturing in 2011 fell 3 cents on the dollar yesterday to 71 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 27.1 percent, more than the average security rated CCC and lower, the worst junk bond tier, according to Merrill Lynch index data.
More than 50 U.S. banks have failed this year, the most since the savings-and-loan crisis of the early 1990s, as lenders struggle with mounting losses on real-estate loans. Washington Mutual’s branches and assets were sold to JPMorgan Chase & Co. of New York after the Seattle-based company was seized by government regulators last year. WaMu had more than $300 billion in assets at the time of the takeover.
Banks have issued $274 billion of debt under the TLGP since Nov. 25, Bloomberg data show. The program opened a channel of funding for financial institutions unable to borrow in U.S. markets after the September collapse of Lehman Brothers Holdings Inc.
By paying the FDIC a fee to back their bonds, banks are able to sell debt with top credit ratings. The TLGP expires Oct. 31. Issuers must have applied by June 30.
“If they don’t get TLGP approval, they will have to jump through a lot of hoops to stay solvent,” said Chris Brendler, a Stifel Nicolaus & Co. analyst in Baltimore. “CIT is hugely important to the retail segment. They’ve made the case that they are important to the economy, though a lot of slack could be taken up elsewhere.”
CIT financed the first Dunkin’ Donuts store more than 50 years ago and helped the company expand outside the Northeast, according to the financial firm’s Web site.
The chain’s franchisees “have credit access from a variety of national, regional and community banks,” Michelle King, spokeswoman for Dunkin’ Brands, said in an e-mailed response to questions. “If CIT increases its liquidity and makes more credit available to our franchisees, it will be helpful to further fuel our continued growth.”
CIT has financed more than 45 Five Guys Burgers & Fries franchise restaurants, of its 445 locations, said Greg deCelle, chief development officer of Five Guys Enterprises LLC of Lorton, Virginia.
The lender, which was on track to finance five to eight openings per month, hasn’t worked on new locations since credit markets tightened, he said.
“Financing is taking longer, delaying openings, which prevents hiring for stores,” deCelle said. “For us it’s not a killer, but for smaller chains it really hampers growth.”
Bondholders are skeptical the FDIC will accept CIT into the program even after GMAC, the auto and home lender that received $13.5 billion from U.S. taxpayers, got approval in May. The company became a bank in December.
Detroit-based GMAC was the first junk-rated company to use the program. It issued $4.5 billion of FDIC-backed notes last month, including $3.5 billion of notes maturing in 2012 at a yield of 0.8 percentage points more than similar-maturity Treasuries.
When the sale was announced, GMAC’s non-guaranteed debt was rated C by Moody’s and CCC by S&P. Its existing 6.875 percent notes due in 2011 were trading at a spread of more than 11 percentage points.
The lender received government funds to provide financing for customers and dealers of General Motors Corp. and Chrysler LLC.
“GMAC had a political angle; CIT doesn’t have the same headline appeal,” Thornburg’s Brady said. “It’s a difficult market to invest in when you have to be a political analyst rather than a fundamental one.”
Brady said he has sold some CIT bonds this year. He declined to specify the amount.
The cost to protect CIT debt from default has risen to 17.6 percent from 9.2 percent on June 2, according to prices from CMA DataVision in London. That’s equivalent to $1.76 million to protect $10 million of debt annually with a five-year credit- default swap contract.
The valuation compares with 4.21 percent, or $421,000, to protect $10 million of General Electric Capital Corp. debt, and 8.95 percent, or $895,000, for GMAC bonds, CMA prices show. GE is based in Fairfield, Connecticut.
“They’re really in a very slow wind-down mode to meet the maturities,” Fitch’s Arscott said. “Their longer-term prospects are really uncertain in terms of the franchise and the ability to conduct business and confidence from their clients.”