European CDOs would suffer widespread hit from CIT

* CIT in portfolios of two-thirds of CDO market -S&P

* CDS spreads on CIT have signaled plight, writedowns taken

* CIT debt is $39 bln, CDS net notional exposure $3.465 bln

By Jane Baird

LONDON, July 14 (Reuters) - CIT Group Inc CIT.N tops the list of names in portfolios of European synthetic CDOs rated by Standard & Poor's, which would mean widespread default losses in the nearly $600 billion market if it files for bankruptcy.

S&P said in late 2008 that 1,053 European synthetic collateralised debt obligations (CDOs) -- 66 percent -- included CIT, a New York-based lender to small and mid-sized businesses, in their portfolios of credit default swaps (CDS).

CIT stock and bonds have fallen this week on fears of a bankruptcy filing, while a source familiar with the matter said the U.S. Federal Deposit Insurance Corp was opposed to a rescue favoured by the Treasury Department and Federal Reserve. [ID:nN13193775]

Since mid-2008, five-year CDS spreads on senior CIT debt have widened in volatile trade, signalling its financial plight, reaching a record closing wide of around 2,744 basis points on Oct. 20, according to Markit data.

"This is a telegraphed punch. People will have seen it coming," said Citigroup credit strategist Michael Hampden-Turner. "Lots of people will have marked it down already."

Even so, people in the market had become more sanguine about systemic risk since the fourth quarter of 2008, he said. "This brings back a reminder that we are not out of the woods yet -- that there is still fallout from the credit crunch to come."

S&P officials could not immediately provide updated information, saying that the timing of an updated list was not yet decided. But credit strategists said limited trading in the synthetic CDO market meant that rankings would probably have changed little since then.

CIT also ranked third among CDO portfolio names in a similar 2008 list by Fitch Ratings, which rates fewer deals than S&P.

"CIT is quite large with $80 billion in assets and $39 billion in debt, and a bankruptcy will have some impact on the market (overall)," BNP Paribas credit strategists wrote.

Moody's cut the company's rating by four notches to B3 on Monday, while S&P cut its counterparty credit ratings to CCC+/C from BB-/B.

Five-year CDS on the company were around 2,521 basis points, or 41 percent upfront, early on Tuesday. That means an investor must shell out $4.1 million initially plus $500,000 per year to buy protection against the default of $10 million of CIT debt.