For CIT, Restructuring Aside, A Larger Problem Looms
01 October 2009 - 5:52AM
Dow Jones News
For CIT Group Inc. (CIT), a critical challenge looms even after
it runs the gauntlet of restructuring in or out of bankruptcy
court: How will CIT get new money to lend out?
While restructuring efforts will buy the struggling lender more
time by cutting its debt load or postponing debt maturities, CIT's
ability to raise funds cheaply - a crucial requirement for any
lender - is severely limited by a banking regulator. Unless these
limits are lifted, the junk-rated company can do little to grow its
lending business; and it would likely spend the time eked out from
a restructuring winding down its loan book, and shrinking to a
shell of its former self.
A spokeswoman for CIT declined to comment for this article.
CIT, a century-old company that is one of the largest lenders to
thousands of small and medium-size businesses, traditionally has
relied heavily on the capital markets - bonds and short-term debt
called commercial paper - for its funding. In turn, it loaned out
these funds at higher interest rates and pocketed the difference as
income.
But the credit freeze shut out CIT and other lenders from these
markets, eliminating this key source of money, known as wholesale
funding.
To cope with the loss of wholesale funding, lenders ranging from
American Express Co. (AXP), to GMAC Inc. to Discover Financial
Services Inc. (DFS) turned their attention to growing deposits as a
means of funding.
CIT owns a Utah bank, which it hoped to use to help fund its
business. But the Federal Deposit Insurance Corp. in July issued a
cease-and-desist order, capping the amount of "brokered deposits"
that CIT Bank can accept. Brokered deposits can grow quickly as a
source of funding, but regulators worry that such deposits can just
as quickly be withdrawn, leaving banks in a precarious
position.
"A business model, like CIT's, which is completely reliant on
wholesale funding probably won't adequately provide for the
company's needs going forward," says Mark Wasden, an analyst at
Moody's Investors Service. "Ultimately, with the redone capital
structure, CIT would probably need more deposits to continue
lending at sufficient volumes to rebuild its loan portfolios."
CIT Bank had been using brokered deposits, which are similar to
certificates of deposit and sold by brokers, to raise more funds.
The holding company had hoped to transfer more of its assets to the
bank, but regulators were concerned about the risk involved.
Ultimately, the fate of CIT could depend on its ability to
persuade the FDIC to allow it to raise deposits to fund assets it
moves into its bank. Its ability to raise deposits is vital to its
survival because the lender can't revert to its traditionally heavy
reliance on bonds and short-term debt for funding.
An FDIC spokeswoman, LaJuan Williams-Dickerson, declined to
comment on the cease-and-desist order for CIT Bank but said the
regulator is working with the company. In such cases, the FDIC will
review its cease-and-desist order after a stated period of time and
decide whether to extend or lift the restriction, she said.
For the second quarter, CIT borrowed funds at a higher rate than
it loaned, an obviously unsustainable practice for a lender. CIT's
net interest revenue - or the difference between what it earned
from the loans it extended and its borrowing costs - totaled a
negative $19.1 million, compared with a positive $169.8 million a
year earlier.
"CIT's funding model doesn't work with its current capital
structure," says Jason Mudrick of Mudrick Capital, which
specializes in high-yield and distressed investments. "It has to
get to a point where it has a business model that is viable."
CIT shares were trading recently at $1.33, down 87 cents, or
39%. The shares have lost about 70% of their value this year.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com
-By Kate Haywood, Dow Jones Newswires; 212-416-2218;
kate.haywood@dowjones.com