Capital Markets

The Liquidity Factor: CIT Group Borrows $7.3B

Contracting conditions on Wall Street spurred the commercial-finance company to scrap previous asset-backed financing plans.
David KatzMarch 20, 2008

With its chairman citing “protracted disruption in the capital markets as well as recent actions by the rating agencies,” Cit Group on Thursday announced that it would borrow $7.3 billion in unsecured loans from about 40 U.S. banks.

The global commercial finance giant will use the money to repay commercial paper and other debt maturing in 2008 and provide financing to its core commercial franchises, it said in a press release. The borrowing “was not our preferential path, but one that is best for the company long-term,” said CEO Jeffrey Peek during a conference call with analysts. “We did it to demonstrate strong liquidity to you and our customers.”

The currently contracting conditions among investment bankers caused the company to scrap previous financing plans featuring debt issuance backed by the company’s assets in equipment, rail, student, and commercial loans in favor of the unsecured bank borrowing. “We had three or four funding plans, but given the environment on Wall Street,” the company had to find a quicker way to add liquidity to get the company through the rest of the year, Joseph Leone, the company’s CFO, said during a conference call. “Nobody says no automatically, but [such deals] become more difficult to do and stretch out in time.”

Along with the $2.5 billion to $3 billion in cash on its balance sheet that the company was averaging in the last week or so, the $7.3 billion would provide enough cash for the company’s needs for 2008, according to the finance chief.

“Our decision today is a result of the protracted disruption in the capital markets as well as recent actions by the rating agencies,” Peek said in the release. “It provides us with added flexibility and ensures that our clients have the financing they need to operate and grow their businesses successfully.”

Leone said the borrowing would consist of four facilities: $2.1 billion maturing in October 2008; $2.1 billion maturing in April 2009; $2.1 billion maturing in April 2010; and $1 billion maturing in December 2011.

Pricing on the facilities, which have much the same terms and covenants is competitive and is based on a ratings grid, a CIT spokesperson told CFO.com. “At today’s rating, we will pay approximately LIBOR plus 50 [basis points] all-in and under no scenario [that] exceeds LIBOR plus 100 basis points.”

Peek told analysts that the company had two plans for repaying the loans and returning “to a “normalized funding program”: selling off assets worth multi-billions of dollars and continue to pursue asset-backed financing.

At least initially, the corporation will keep its core middle-market commercial financing business—trade, corporate, transportation, and vendor financing—off the market, the executives said. “We do see those businesses as our marquee businesses and would like to keep them intact” as much as possible, Leone said, adding that at least for now, those asset sales “wouldn’t impair those lines of business.”

CIT’s borrowing from its credit facilities will not affect its Standard & Poor’s credit rating or outlook, the Associated Press reported on Thursday. S&P reduced CIT’s counterparty credit rating to “A-/A-2” from “A/A-1” and placed it on a negative outlook earlier in the week.