Darrell Hughes and Maya Jackson Randall report in the Wall Street Journal that the U.S. Federal Reserve is stepping up pressure on CIT Group Inc. to come up with a viable plan for survival.
CIT agreed to submit two separate plans to the Fed in coming weeks, the company said on Thursday. One would give a roadmap for maintaining sufficient capital and another would outline ways CIT plans to improve its overall financial condition. Additionally, the commercial lender has agreed to give the Fed a say over dividend payments, debt and stock purchases.
The order gives the New York lender 15 days to submit its capital plan and 75 days to hand in a report on improving its financial position.
“It sounds like there isn’t enough progress on the company’s restructuring,” said Scott Peltz, managing director of restructuring at consultancy RSM McGladrey in Chicago. “The Fed is effectively saying that it doesn’t believe the company is going in the right direction and it either has to get on track or take more definitive action, which would be bankruptcy.”
Also Thursday, CIT announced that it put in place a stockholder-rights plan to preserve potential income-tax benefits. Company spokesman Curt Ritter declined to comment further.
According to the Fed order, the goal of the written agreement is to “maintain the financial soundness” of CIT so that it can serve as a source of strength to its Salt Lake City state-chartered bank.
CIT bonds and shares rose on Thursday. The shares added 17 cents, or 13%, to $1.45.
CIT, which became a bank-holding company in December, has been working in recent weeks to avoid filing for Chapter 11 after finding itself shut out of the capital markets and unable to persuade the government to stand behind its debt. The company faced a worsening liquidity crisis as its customers drew down credit lines, draining its cash.
The lender got more breathing room last month when it received a $3 billion emergency loan from a group of its six largest bondholders. Still, the company has said more than once a host of issues have left “substantial doubt” about its ability to continue.
The company last week tweaked the terms of a crucial tender offer for $1 billion of floating rate notes due Monday and has stopped paying dividends on some preferred stock.