CIT Heads Deeper Into Junk Status (CIT)

CIT Group, Inc. (NYSE: CIT) has been hit steadily after news that it was not going to have the government loan guarantees, then on concerns that certain customers could be left in the lurch, and now on concerns that a reorganization under Chapter 11 might be fairly close.  Many disagree on the latter, but shares closed down almost 12% today at $1.35 on over 200 million shares.  To add insult to injury, CIT was downgraded deeper into junk bond territory by Standard & Poor’s.  Ditto for Moody’s.  Fitch Ratings made its downgrade last week.

Standard & Poor’s has cut CIT Group due to liquidity concerns in the hear-term and its failure to secure government-guaranteed funding.  The latter only exacerbates the former.

The downgrade was a nearly unheard of four notches, down to CCC+.  This is on the heels and even more of a downgrade then Moody’s Investors Service.  S&P also still has CIT on watch or review for additional cuts.  The rating agency feels that if more capital is not raised that the company might try to restructure its debt in bankruptcy or via an exchange offer that S&P could consider distressed.

With both Sheila Bair and Timothy Geithner monitoring the situation, the prognosis does not sound that good.  The question revolves around whether or not CIT poses the dreaded systematic risk.  There is a fear by many that the lack of capital could hit many small and mid-sized businesses if CIT is suddenly out of the picture.  It has filled in where large and super-regional banks have stayed away from in many occasions.

If you look through the coming liquidity needs, CIT also has maturities in each of the next two quarters of more than $1 billion in unsecured notes. As an outsider, it is hard to know if there is real systematic risk or not, but what is obvious is that the failure or closure of CIT would cause fallout in many small operations.  The only hope here is that after all of the trouble we have already seen from CIT and many other lenders would be that business owners and managers diversified their sources of capital.  Having CIT as a sole-source would have been a scary notion over the last nine months or more.  Having CIT as a sole-source today, that is too risky of a proposition.

We have shares down another 5% at $1.28 after the close today.  Whether or not that holds is something else.

JON C. OGG
JULY 13, 2009