After a weekend announcement that CIT Group Inc. had hired a law firm to explore bankruptcy options, the firm struggled to explain its decision to anxious customers and investors and warned that its demise would "precipitate a crisis" for the retail industry.
CIT received $2.3 billion in assistance late last year under the Troubled Asset Relief Program.
The New York-based commercial bank said on Saturday that it had hired Skadden, Arps to provide legal advice as it considers liquidation. It faces a looming $2.1 billion payment to creditors due early next year, and in April posted a larger than expected $3 billion loss. The stock price has been battered in the past week, and fell more than 20 percent in early trading today.
Fears that the company is exploring bankruptcy threaten to make a bad situation even worse by prompting fearful depositors to withdraw assets and businesses to draw down their credit lines. This would further destabilize the company's balance sheet, make any potential bankruptcy even more likely, and hurt businesses relying on access to loans.
Bloomberg News reported that an internal CIT analysis predicts that in the case of bankruptcy, a "substantial portion" of clients "would not have easy access to additional revolving credit without CIT. This could lead to business failure for those who lack additional liquidity." Some 300,000 retailers could be affected, the report claimed.
In response to concerns, CIT said Sunday that it is in "active discussions with its principal regulators on a series of measures" to improve its short-term liquidity. Among the options it is considering is the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), which would allow the company to issue low cost bonds on the government's guarantee.
If the company is not approved for the TLGP program, it said it would consider "the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank."
CIT received $2.3 billion in assistance late last year under the Troubled Asset Relief Program.
The New York-based commercial bank said on Saturday that it had hired Skadden, Arps to provide legal advice as it considers liquidation. It faces a looming $2.1 billion payment to creditors due early next year, and in April posted a larger than expected $3 billion loss. The stock price has been battered in the past week, and fell more than 20 percent in early trading today.
Fears that the company is exploring bankruptcy threaten to make a bad situation even worse by prompting fearful depositors to withdraw assets and businesses to draw down their credit lines. This would further destabilize the company's balance sheet, make any potential bankruptcy even more likely, and hurt businesses relying on access to loans.
Bloomberg News reported that an internal CIT analysis predicts that in the case of bankruptcy, a "substantial portion" of clients "would not have easy access to additional revolving credit without CIT. This could lead to business failure for those who lack additional liquidity." Some 300,000 retailers could be affected, the report claimed.
In response to concerns, CIT said Sunday that it is in "active discussions with its principal regulators on a series of measures" to improve its short-term liquidity. Among the options it is considering is the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), which would allow the company to issue low cost bonds on the government's guarantee.
If the company is not approved for the TLGP program, it said it would consider "the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank."
published July 13, 2009, 0 Comments
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