CIT to raise $1.4 billion to aid switch to holding company

NEW YORK (Reuters) - CIT Group Inc (CIT.N), a commercial lender, said on Monday it plans to boost capital by $1.4 billion by selling shares and swapping some debt in its efforts to become a bank holding company.

The company, which has been struggling to finance its operations during the credit crunch, last week applied to become a bank holding company, which would allow it to use the Federal Reserve as a lender of last resort. CIT is seeking $2.5 billion in capital under the U.S. government's $700 rescue program for the financial industry.

CIT's plan to become a bank and qualify for funds under the Troubled Assets Relief Program is critical to the survival of the commercial lender, analysts said.

In a statement on Monday, CIT said it will be raising the $1.4 billion by exchanging some senior debt for subordinate debt and cash. It is also exchanging some mandatory convertibles for newly issued common stock.

The amount raised through common stock will depend on the demand for both offers, said a company spokesman.

Any equity sale may be difficult because CIT stock has lost more than 80 percent of its value this year.

"If they can convince people they're going to become a bank holding company, it will be doable," said Howard Shapiro, an analyst at Fox-Pitt Kelton in New York. "That's how they will survive."

CIT said the measures will help it exceed the "well capitalized" requirement as a bank holding company.

Non-bank financial companies have long funded themselves in the stock, bond and bank loan markets rather than relying on deposits. But the credit crunch has made this business model prohibitively expensive, and many are seeking to become banks.

Last week, credit card company American Express Co (AXP.N) said it had become a bank holding company as part of its bid for government funds.

CIT's shares fell 19 cents, or 4.6 percent, to $3.95 in late-morning trade on the New York Stock Exchange.

(Editing by Maureen Bavdek and John Wallace)