US CREDIT-CIT debt reduction plan may not be enough

By Karen Brettell and Dan Wilchins

NEW YORK, Oct 2 (Reuters) - CIT Group (CIT.N) hopes to fix
its balance sheet and turn itself around, but its plan so far
may not save the company even if it can be executed.

The lender to small and mid-sized companies on Thursday
launched a debt-exchange offer in which it aims to reduce debt
by at least $5.7 billion and avoid filing for bankruptcy.

But for a company with $71 billion of assets supported by
less than $3 billion of equity, that may not be enough extra
capital, analysts said.

"We question whether CIT is improving its profile enough,"
analysts at CreditSights said in a report on Friday. The
reduced debt may appease regulators at the Federal Reserve, but
would not likely allow the company to fund itself in the
corporate bond market or achieve investment grade credit
ratings, the report said.

Time is of the essence. The longer it takes CIT to
turnaround, the harder it will be to wring the maximum return
possible from its assets, and to win new business.

The plan CIT has put forward, however, could take a long
time to complete -- the company hopes to fix its balance sheet,
and then fund new business out of its bank 12 to 18 months
later, an eternity in the financial world.

"In the meantime what happens in a plan like this is the
balance sheet deteriorates," said Ricardo Kleinbaum, trading
sector specialist at BNP Paribas in New York.

Even executing the exchange could be difficult. The
unsecured borrowers can swap their debt for new secured
obligations. That puts them in a better spot than they are in
now, but they will still be in a worse spot than the funds that
gave the company a $3 billion loan over the summer, who have
the first claim on a large pool of assets, noted Kevin Starke,
senior analyst at CRT Capital Group.

Those lenders may increase the size of their loan, too,
leaving less collateral for other bondholders.

Meanwhile, investors holding credit default swaps on CIT
may have an incentive to refrain from participating in the
exchange and try to send the company into bankruptcy.

It's not known how many bondholders also hold credit
default swap protection.

Net volumes of around $3.6 billion are outstanding in
single-name swaps protecting CIT's debt, according to the
Depository Trust & Clearing Corp, which is a small portion of
the company's overall $30 billion in unsecured debt.

CIT said that holders of about $10 billion in debt have
already indicated they will participate in the exchange or vote
for the prepackaged bankruptcy.

"They need much more support than that," Starke said. If
the company does not receive enough interest in its debt
exchange, it hopes to get enough support for a prepackaged
bankruptcy, which requires less support to go through.

CIT is attempting to lure its short-term bondholders into
participating in the exchange by offering a higher portion of
new secured debt than it is offering longer-term debt holders.

"Whether this goes through it will depend on the mix of
holdings, and the front end versus the long end, and there are
a lot of people with CDS that may have an interest in this not
going through," BNP Paribas' Kleinbaum said.
(Editing by James Dalgleish)