Tuesday, July 14, 2009

CIT timeline (CIT)

AlphaNinja - If you haven't heard of commercial lender CIT Group (CIT), you will. They are one of the largest lenders to American small businesses, and are next up for a "bailout" of sorts.

In CIT's case, the stock has been trading based on the prospects of the company's application to have the FDIC guarantee its debt. The Temporary Liquidity Guarantee Program (TLGP, we live in a time of acronyms) is of critical importance to the company's ability to fund operations.
At risk of putting you to sleep, I bring this up because it's an interesting case of "too big to fail." Will the government step in, and if so, will the manner in which they offer aid destroy stockholders? Based on the company's debt protection costs (in recent days it would cost $2.3million to insure $10million in debt - that implies debtholders are expecting a haircut, thus the equity would be gone), I worry that bailout or not, the equity may be worthless.

April 23rd -->> CIT reports a quarterly loss of $1.30 per share (keep in mind the company shares traded at $3.52 per share at this point!). Massive downgrades sent the shares down significantly.

April 24th -->> Barclays is curious as to why the company's application for FDIC backing was not yet approved - "do not understand why CIT has not received TLGP given that it has ample common and preferred in the capital stack to protect the FDIC. Firm says CIT seems like exactly the kind of lender that merits this aid to make more SBA and middle market loans."
Moody's downgrades the company due to "deterioration of CIT's asset quality trends, which contributed to a $430 million pre-tax loss for the first quarter. Moody's believes that pressures from further declines in asset quality and higher average borrowing spreads will likely result in CIT reporting additional operating losses through at least 2009. Moody's is concerned that the magnitude of net losses could jeopardize CIT's compliance with regulatory capital requirements."

June 2nd -->> Stifel increases their estimate of the likelihood that CIT will get FDIC backing from 20% to 40%, based on the FDIC's assistance to General Motors as precedent.

July 8th -->> Fitch downgrades CIT, as the company's fortunes are completely tied to the FDIC. "CIT remains heavily reliant on wholesale funding amidst challenging market conditions. CIT's application for funding under the FDIC's Temporary Liquidity Guarantee Program (TLGP) remains active, but has not yet received approval. Fitch is maintaining CIT on Watch Negative pending resolution of CIT's TLGP application. If CIT's application is not approved over the very short term, Fitch would likely lower CIT's ratings to levels that would indicate that default is a real possibility."
July 9th -->> The Financial Times reports that CIT is in begging mode with the FDIC.
"CIT is pressing regulators to end a six-month wait and allow it to issue government-backed bonds in an effort to allay mounting concerns over its financial health. CIT is the only major financial group that received bail-out funds which has not been given the go-ahead to issue debt guaranteed by the FDIC despite having applied in January. The long wait has triggered fears among equity and debt investors that CIT might find it difficult to fund itself if credit markets remain tough."

July 10th -->> Bloomberg reports that the
"FDIC is unwilling to guarantee CIT's bond sales because the commercial lender's credit quality is worsening, according to people familiar with the regulator's thinking. The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk, said the people. The federal agency 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."

Also July 10th -->> That Bloomberg report (above) sent the shares screaming lower, so the company put out a release stating that "CIT continues to be in active dialogue with the government. 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."

July 13th -->> Reports come out that CIT execs spent the weekend working with new bankruptcy advisers Skadden, Arps -->> NOT a good sign for equity investors.

Also July 13th -->> The company's stock tanks, as investors realize the equity could be gone. Another round of downgrades from Moody's and S&P is comical in its tardiness, and may even be a contrary indicator. The Treasury and Fed are in favor of helping CIT, but the FDIC is not. For now.

Finally, July 14th! The stock is up 23% to 1.66 as I write this, on speculation that the government will help out. What remains to be seen is exactly what sort of help will be offered, and what that will mean for shareholders.
From the WSJ:
"U.S. government officials are in advanced talks about providing some sort of aid to CIT Group (CIT) people familiar with the matter said. The discussions are fluid. It remains unclear whether a final deal can be brokered and, if so, how expansive it might be. CIT has been battered by heavy losses, but so far, regulators haven't deemed its problems big enough to pose a threat to the broader financial system. Government officials are worried, however, about unforeseen consequences that a CIT collapse could trigger. One possible source of aid would be a FDIC program that guarantees newly issued debt. CIT has been seeking for months to take advantage of this program, but the FDIC has been reluctant to let it, because of CIT's financial weakness. The Treasury Dept. and the Federal Reserve are more supportive of such a move, said several people familiar with the process. It remained unclear Monday whether the FDIC would soften its position and let CIT issue federally guaranteed debt. Government officials are also considering other steps, including a regulatory waiver that could make it easier for CIT to pass assets from its parent co to its bank division, as well as a separate way to borrow from various government programs."

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