Credit analyst warns of paying up for CIT in hopes of savior

By Ronda Fears

Nashville, Tenn., Feb. 15 - There may be 50 ways to leave your lover, but Gimme Credit senior bond analyst Kathy Shanley warns against paying up for CIT Group (A2/A) on the hope that a rescuer will emerge as the company splits with Tyco International. While a sale of the unit is in offing, the analyst noted very little cushion for CIT to deal with a staggering $14.7 billion in debt maturing by the end of September.

"We wish we could say definitively CIT will be sold off to a GE Capital or other strong buyer and make this nightmare go away. Last year's proxy disclosed another buyer had looked at CIT, but the offering price was lower than Tyco's bid. The credit environment is weaker now, which may depress the price a buyer would pay for CIT. Failing a sale, a spinoff seems the likeliest event, with Tyco now saying it

may retain a minority stake, though not a board seat," Shanley said in a report Friday.

"The problem is that even with a spinoff, it's not clear the confidence of commercial paper buyers will be automatically restored. We thought the dramatic widening of spreads last week on CIT paper was an overreaction, but even after a spinoff, CIT will face challenges. We'd be wary of paying up for this paper on the hope of a rescue that may not happen."

To further illustrate its intentions of splitting with Tyco, CIT Group officially dumped the Tyco Capital moniker it assumed after it was acquired last year by the conglomerate. Of greater importance to investors, Shanley continued, CIT also said it had finished amending its public debt indentures so as to prohibit loans and dividend payments to the parent and restrict inter-company asset sales and other arrangements.

"Though the story keeps changing from day to day, it now appears Tyco International is backing away from some parts of its proposed spinoff plan, but the sale or spinoff of the finance company is still on the front burner," the analyst said.

CIT's quarterly SEC filing, made public on Thursday, includes details of its bank agreements and discloses its financing needs in more detail, but does not spell out the actual language modifying the indentures. Total debt maturing between now and the end of September is a sobering $14.7 billion. As previously disclosed, CIT has already drawn down $8.5 billion in bank lines. This will cover all but a fraction of the $8.6 billion in commercial paper maturing by September, of which $7.9 billion will have already rolled off by the end of March.

CIT says it will be using existing securitizations and $3 billion in new securitization facilities to cover the $6 billion in term debt maturing between now and September. This leaves operating cash flow available to fund new business, but Shanley noted there isn't much cushion available to fund growth. This financing scenario also presumes all of the banks on the $4 billion 364-day facility agree to extend the loan, she added. It appears that the latest amendment to the facility on March 27 gave the banks the opportunity to opt out of the one-year extension and demand repayment on the termination date, she noted.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.