CIT Won’t Get Additional Bailout Money; Bankruptcy Likely

Money Morning
July 16, 2009

CIT Group Inc. (NYSE: CIT) said today (Thursday) that its discussions with the U.S. government have ceased and will not receive any more taxpayer funds.

CIT, which received $2.3 billion in Troubled Asset Relief Funds (TARP) in December, said “there is no appreciable likelihood of additional government support being provided over the near term,” and that it is “exploring alternatives.”

The most likely alternative for CIT is bankruptcy, according to analysts.

“Maybe they can put together a last-minute deal and try to sell themselves,” said Adam Steer, an analyst with CreditSights Inc. in an interview with Bloomberg News. “The most viable alternative once the government decides to not step in is a trip into bankruptcy.”

The company is seeking $2 billion in rescue financing from existing debtholders and has given them 24 hours to come up with the cash, according to a report in The Wall Street Journal, which cited anonymous sources. Should that effort fail, bankruptcy won’t be far off.

Retail Impact
A CIT bankruptcy could have a trickle down effect on the supply chain of many small- to mid-sized retailers.

“At the risk of sounding overly cautious, if the government did not help CIT, we could see significant inventory issues for the holidays,” David Strasser, an analyst at Janney Montgomery Scott LLC told the Los Angeles Times. “Some vendors would simply not be able to finance shipments to retailers for holiday.”

Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) rely on CIT for factoring, an old form of finance in which the lender pays the vendor for its accounts receivable. If the retailer fails to pay for the goods, the lender assumes the responsibility to pay the vendor.

Not even an open statement on Wednesday from the National Retail Federation endorsing the need for TARP funds for CIT could help the lender.

“If the criterion for whether a financial institution should receive government assistance is whether it is ‘too large to fail,’ CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress,” NRF President and Chief Executive Officer Tracy Mullin said. “A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation’s economy. That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”

While inventories are important to retailers – especially during the holiday season – the fear of declining consumer spending amid rising unemployment could keep retail merchandise supplies at a lower rate than last year, especially after last year’s dismal holiday shopping season. Thus, the lack of CIT may be offset in part by shrinking retail inventories.

Share of CIT plummeted in midday trading yesterday (Thursday), falling more than 68% to 51 cents.