CIT troubles mount but its bonds rally; retailers shrug off CIT woes, with some trading higher

By Stephanie N. Rotondo

Portland, Ore., July 17 - As was expected, CIT Group Inc. kept market players busy Friday, as bankruptcy buzz increased and reports indicated the company was searching for debtor-in-possession financing.

On the news, the company's debt was trading "all over the place," a trader said, but was still largely better.

"There are just lists and lists of CIT paper, so it's been kind of crazy," said one trader. He said that many small retail accounts were liquidating positions, creating "a lot of traffic."

Still, there was "not a lot of trading away from CIT," the second trader notes. He said there were better bids coming in, but few trades.

Even the retail arena, which could face more pressure should CIT go under, remained relatively calm. In fact, traders reported that names such as Neiman Marcus Group Inc. and Michael's Stores Inc. actually improved on the day.

Looking forward to next week, a trader speculated that CIT will continue to dominate the marketplace.

"I think CIT will be the big name again next week," he said, remarking that "something will definitely happen over the weekend."

CIT troubles mount

CIT Group's bonds were once again the focus as the week came to an end. Market players were left to ponder what might happen over the weekend.

"It feels like they might file," said one trader. "Everybody is really anxious."

The trader added that "with every rumor," the company's debt either drove forward or retreated - especially the 2009 issues.

"It's very newsy," said another trader. "It just changes the prices dramatically."

The second trader also said that "noise" regarding possible bondholder meetings have emerged.

"Somebody is floating something out there about converting debt to equity," he said. He claimed that particular move would be aimed at "getting the government to reengage" in bailout talks.

But as the company looked to its advisers - JPMorgan Chase & Co. and Morgan Stanley - CIT bonds regained some of the ground lost on Thursday.

One source saw the 4¾% notes due 2010 opening at 52 bid, 53 offered, only to end closer to 62 bid, 63 offered. Another source called the floating-rate notes due 2009 70.5 bid, a gain of about 13 points, while the 5.2% notes due 2010 jumped 12 points to 61 bid.

At another desk, the 5% notes due 2014 were seen closing at 53 bid, 55 offered. That compared with levels in the high-40s to low-50s on Thursday and levels in the low-60s on Wednesday.

The trader also pegged the 6 7/8% notes due 2009 at 64 bid, 65 offered, up from around the high-50s.

"The short stuff was really moving," he said. "Most of the volatility came in the 2009 paper, but you saw similar patterns in the rest of them, just to a smaller degree."

For example, he said, the 7 5/8% notes due 2012 - one of the more actively traded issues - ended Wednesday at 67 bid, 68 offered, then fell Thursday to 51 bid, 53 offered. He said come Friday, the bonds hit highs in the high-50s, before settling back in a tad.

The company's revolving credit facility also got a boost. The loan traded up to 60 bid, 62 offered from 55 bid, 57 offered previously. The move was attributed to players jockeying for position ahead of any potential filing.

With the government bailout option off the table, CIT now has to figure out a way to address its liquidity issues - and how to pay $1 billion in debt maturing next month. It has been reported that the company will need as much as $6 billion to stave off a bankruptcy filing.

According to one news outlet, a small group of bondholders have formed and pledged up to $2 billion to help the company. The group is also reported to have hired a law firm, White & Case.

On Thursday, several bondholder calls were reportedly held, with Pacific Investment Management Co. playing the host. Some reports indicated that a debt exchange was one of the options the group discussed.

Apart from CIT, a market source saw American International Group, Inc.'s 6¼% bonds due 2036 gain more than 4 points on the day to end above 46.

A market source also saw some activity in the hybrid securities of nominally investment-grade financial companies. Citigroup's 8.3% paper due 2057 was quoted at 78, on $16 million traded, and Capital One Capital IV's 6.745% securities due 2082, up 2.5 points at 67.5, on about $10 million traded.

Retailers shake off CIT woes

But CIT's failure isn't the only thing weighing on the minds of investors. Should CIT fail, many of the small- to medium-sized businesses it lends to could be at risk, including a number of retailers already struggling with the economic downturn.

One retailer, Urban Outfitters, has already said it might consider making short-term loans to vendors if CIT files for bankruptcy. According to Bloomberg, about 7% of Urban Outfitters' vendors receive short-term financing from CIT.

Still, retailers have thus far managed to shake off most of the concerns CIT has presented.

One trader said Neiman Marcus Group's bonds had traded up 3 to 4 points in the past two days, placing the 10 3/8% notes due 2015 at 58.5 bid, 59.5 offered and the 9% notes due 2015 at 61 bid, 61.5 offered.

Michael's Stores' notes were also better, the 10% notes due 2014 at 84 bid, 85 offered, versus 83 bid, 84 offered Thursday and the 11 3/8% notes due 2016 at 68.5 bid, 69.5 offered, up from 67.5 bid, 68.5 offered.

Paul Harris and Paul Deckelman continued to this article.

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