Pierre Paulden and Caroline Salas report at Bloomberg News that CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in its stock and bonds.
The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening, said people familiar with the regulator’s thinking who declined to be identified because the talks are private. The FDIC has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25.
“Skadden is one of the principal law firms representing CIT,” Curt Ritter, a spokesman for New York-based CIT, said in an e-mail. “They represent the firm on a wide variety of corporate matters. CIT will not comment on any specific aspect of their engagement.”
The Wall Street Journal, citing people it didn’t identify, said the hiring comes as CIT prepares for a possible bankruptcy filing. New York-based Skadden is known for its work in mergers and acquisitions and bankruptcies. The firm represented BHP Biliton Ltd., the world’s largest mining company, in its $150 billion proposed acquisition of Rio Tinto, and advised Circuit City Stores Inc. in its bankruptcy.
The federal agency, run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including raising capital, said one of the people. CIT’s measures to improve its credit quality, such as by transferring assets to its bank, have been insufficient, the person said.
CIT’s $500 million of floating-rate notes due in November 2010 fell 3.5 cents on the dollar yesterday to 70 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit-default swaps on CIT rose 2.5 percentage points to 37 percent upfront, and earlier reached 38 percent, according to broker Phoenix Partners Group. 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 CIT debt for five years. The upfront cost reached the highest since Oct. 17, when it climbed to a record 41.5 percent, according to CMA DataVision prices.
The stock fell 33 cents, or 17.7 percent, to $1.53 in New York Stock Exchange composite trading yesterday, after earlier falling to $1.13, the lowest in seven years. CIT’s stock plunged 59 percent this year through yesterday, underperforming the Russell 1000 Financial Services Index by 50 percentage points.
CIT became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury. The lender, which has reported more than $3 billion of losses in the past eight quarters, faces $10 billion of maturing debt through 2010 and hasn’t had access to the corporate bond market in more than a year, according to data compiled by Bloomberg.
Without the TLGP, CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.
“CIT continues to be in active dialogue with the government,” the company said yesterday in a statement distributed by Business Wire. “There can be no assurance that CIT’s application will be approved by the FDIC, nor as to the timing or terms of any such determination.”
Ritter, the CIT spokesman, has declined to comment on the FDIC’s reasons for the delay. Andrew Gray, spokesman for the FDIC in Washington, declined to comment on CIT’s pending application.
The TLGP 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.
The FDIC has given competitors from Fairfield, Connecticut- based General Electric Co. to GMAC Inc. of Detroit access to the TLGP during the worst credit crisis since the Great Depression. GE is rated Aa2 by Moody’s Investors Service and AA+ by Standard & Poor’s, the third- and second-highest credit grades.
A failure of CIT would be the biggest bank collapse 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.
Fitch slashed CIT to speculative grade, or junk, in April, then lowered the lender’s rating again on June 1 to BB and cut it to B+ this week. Moody’s cut CIT three levels to Ba2 from Baa2 on April 24. S&P downgraded CIT three grades to BB- on June 12.
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.