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CIT May Tap $7.3 Billion in Bank Lines, Fitch Says (Update2)

By Shannon D. Harrington and Pierre Paulden

March 19 (Bloomberg) -- CIT Group Inc., the largest independent commercial finance company in the U.S., may need to tap $7.3 billion in backup credit lines because its access to unsecured short-term debt has become ``materially constrained,'' Fitch Ratings said today.

Fitch said it may downgrade New York-based CIT's credit ratings, following cuts by Moody's Investors Service and Standard & Poor's the past two days.

CIT, which last year stopped originating home loans amid the biggest housing slump in more than a quarter of a century, posted a $123.2 million loss before preferred dividends last quarter because of bad mortgages and the declining value of its student- loan business.

``If they're not able to tap the unsecured markets, investors start to get spooked and try to figure out, `How are these guys going to finance themselves?''' said John Guarnera, a debt research analyst at Bank of America Corp. in Charlotte, North Carolina, in a telephone interview today.

CIT has $2.8 billion in outstanding commercial paper, which is short-term financing that companies typically use to fund daily operations, and $8.2 billion in debt maturing this year. The downgrades by Moody's and S&P ``could result in a loss of'' access to commercial paper, said Guarnera, who on March 11 lowered his recommendation on the debt to ``neutral'' from ``buy.''

Mary Flynn, CIT's director of media relations, didn't immediately return telephone messages.

Moody's Downgrade

Moody's yesterday cut its short-term rating on CIT one level to Prime-2 from Prime-1 and lowered the long-term ratings to A3, its fourth level of investment grade, from A2. The ratings firm said it may cut the long-term ratings further.

The credit turmoil is ``challenging the strength of CIT's liquidity profile to a degree not previously experienced by the firm,'' Moody's analysts led by Robert Young in New York wrote in a report yesterday.

A day earlier, S&P cut CIT's short-term rating one level to A-2 from A-1 and the long-term rating to A- from A.

By tapping its credit lines, CIT wouldn't necessarily trigger a downgrade from Fitch, Vincent Arscott, an analyst at the ratings firm, said in a report today.

``The underlying fundamentals of the business remain fairly solid,'' Arscott said in an interview. ``That's considering the current environment'' in credit markets, he said. ``They were able to withstand other shocks up until now.''

Revolving Credit

Banks including Citigroup Inc., Bank of America Corp. and Barclays Plc have committed to four separate revolving credit lines totaling $7.3 billion, according to regulatory filings last month.

CIT's bonds and credit-default swaps are trading at distressed levels and its shares have plunged 77 percent in the past year.

Credit-default swaps tied to CIT's senior unsecured bonds traded at 23 percent upfront and 5 percent a year, meaning it cost $2.3 million initially and $500,000 a year to protect $10 million of CIT bonds from default for five years, according to broker Phoenix Partners Group in New York. That's up from an initial cost of 17.5 percent in early trading today.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Notes Fell

CIT's $700 million of 5.2 percent notes due in 2015 today fell to 67.5 cents on the dollar, down from 81 cents on March 6, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service. The yield widened to 12.1 percent from 8.8 percent, and the extra yield investors demand above Treasuries with similar maturities widened to 8.76 percentage points from 5.2 percentage points.

CIT's shares dropped $1.65, or 12 percent, to $11.64 today in New York Stock Exchange composite trading.

If CIT draws down on its credit lines, it could exacerbate the negative sentiment among investors, Guarnera said.

``For any finance company, it certainly sends very negative signals and the market tends to react very negatively,'' he said. ``These facilities are not typically meant for working capital purposes. They're meant for emergency or contingency purposes.''

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net"