US CREDIT-CIT caught as wide spreads restrict debt sales

By Karen Brettell

NEW YORK, July 2 (Reuters) - CIT Group Inc (CIT.N) may be
caught in a Catch 22 situation as improvement in its credit
spreads may depend on the commercial lender showing it has
economical access to the unsecured debt market.

CIT's credit default swaps barely budged after the company
said on Tuesday it would sell $10 billion of mortgage assets in
a deal that removes problem loans from its balance sheet. For
details, see [ID:nBNG289741]

The cost to insure its debt with credit default swaps are
little changed at around 742.5 basis points on Wednesday, or
$742,500 per year for five years to insure $10 million in debt,
according to Markit Intraday.

"The funding outlook remains cloudy as credit default swap
spreads imply the company remains largely shut off from
economical unsecured options," CreditSights analysts Richard
Hofmann and Adam Steer said in a report on Wednesday.

CIT has traditionally relied on unsecured debt, commercial
paper and asset securitizations to finance its operations.

CIT's spreads soared past 1,000 basis points in March when
it said it drew on its entire $7.3 billion in bank lines after
it was unable to refinance maturing commercial paper.
Meanwhile, market appetite for securitized assets has also
dried up.

Management at CIT have said they want to sell new unsecured
debt, though Chief Executive Jeff Peek said on Wednesday the
company does not believe it needs to raise additional capital
in the near term.

Based on credit default swap levels, a new 5-year bond sale
by CIT would price at a yield of around 11.65 percent, the
CreditSights analysts said.

"At a recent conference the company hinted that it is
targeting around an 8 percent handle for a new unsecured issue,
and CDS levels imply that the company would still be
significantly challenged to get a deal done at those levels,"
they said.

Moody's Investors Service and Standard & Poor's both said
on Tuesday that CIT's access to the unsecured market is key to
its ratings, and Moody's said economical access is critical to
its long-term liquidity.

"The 'Baa1' rating anticipates that CIT will have adequate
liquidity to support a transition of its funding to include
regular unsecured debt issuance," Moody's said in a statement.

The ratings agency added that the sale of the home lending
business "will allow CIT to put the mortgage issues behind
them, which could ultimately ease their access to the unsecured
debt markets."

Moody's rates CIT's unsecured debt "Baa1," the third lowest
investment grade, and has it on review for downgrade. S&P rates
the debt one notch higher at "A-minus," with a negative
outlook, indicating a downgrade is more likely over the next
one to two years.

"We could revise the outlook back to stable if CIT can
access the unsecured or secured debt markets at economically
attractive rates while maintaining adequate asset quality and
capitalization," S&P said.

Bank of America analysts believe the company needs access
to the unsecured debt markets even at a higher cost to fund its
operations.

"Reestablishing access to the unsecured markets at this
point is more important than the pricing, as the company needs
access to continue to operate its business model," analysts
John Guarnera and Bryan Cook said in a report.

"Company management had been vocal about wanting CIT to
return to the unsecured market, and it may have now missed the
best opportunity to do so," they added.

And while removing the mortgage exposures may take out some
of the company's future earnings volatility, it still has
commercial loan exposures, which could weaken in a slowing
economy, CreditSights said.

"Credit quality in the core commercial loan book remains a
key watchpoint as CIT's highly leveraged small to mid-size
clients could be disproportionately impacted by a potential
recession in our view," they said.
(Editing by Leslie Adler)