CIT's bankruptcy exit fraught with uncertainty

NEW YORK (Reuters) - CIT Group Inc (CIT.N) is looking for a quick exit from Chapter 11 protection but its long-term survival outside of bankruptcy depends in large part on what regulators will allow it to do with its various businesses.

"CIT in general isn't out of the woods yet," said Jeffrey Knopman, principal of Profit Solutions Group Inc, which helps vendors deal with retailers. The bankruptcy financing gives the company a bit of a reprieve, he said, adding, "I think the jury's still out on the longer term."

CIT hopes to move some of its best businesses, including vendor financing and factoring, to its bank, where it can fund them with deposits. But regulators may balk at this move.

Earlier this year, the Federal Deposit Insurance Corp and Utah state banking regulators put CIT Bank under a cease and desist order that prevents it from collecting new deposits.

CIT hopes that once its holding company is better capitalized, regulators will lift that order. But the FDIC may be reluctant to take the risk as it wrestles with a rising tide of bank failures.

In July, the FDIC refused to guarantee CIT bond issues, which could be a sign that government approval even after bankruptcy will be tough.

Even if CIT does get government approval for this plan, it will struggle to raise the deposits it needs, Sean Egan, founding principal of Egan-Jones Ratings said.

The company also has to figure out what to do with its remaining businesses, including its aircraft and railcar leasing operations. CIT is likely to have trouble funding them even when it gets out of bankruptcy.

CIT's efforts in recent years to find funding partners or to sell these business have not worked, and may not work in the future.

CONFIDENCE

While CIT has isolated its better businesses from bankruptcy, there is still a risk that customers will run to more stable rivals, leaving the lender with a reduced business once it exits bankruptcy.

Many clients of CIT's roughly $42 billion factoring business, among its better-performing units, remain concerned about the lender's longer-term ability to provide financing, analysts said.

"It's a question of whether or not the bankruptcy restores customers' confidence -- and that's very questionable," said Michael Stanley, a managing director at competing factoring company Rosenthal & Rosenthal, noting that his company is adding clients from CIT.

One thing helping CIT now, though, is the lack of alternatives for many borrowers, as banks tighten their belts and scale down their loan books.

CIT's other struggle will be to regain a credit rating that will allow it to issue debt at reasonable rates to finance other lending businesses, such as railcar leasing. CIT Group is unlikely to emerge from bankruptcy with an investment-grade credit rating, which is usually a necessity for a financial firm.

Regaining investment-grade ratings could take some time, said Scott Peltz, managing director of restructuring at consulting firm RSM McGladrey.

"They need to have a capital structure that allows for a profitable business going forward," Peltz said.

CIT tried to sell some of its lending businesses including its railcar leasing unit this year and last year but without success. If prices were low enough, though, some buyers may grow interested now.

Large regional banks such as U.S. Bancorp (USB.N) and PNC Financial Services (PNC.N), or other companies with experience in leasing and commercial lending, like General Electric (GE.N) or Wells Fargo & Co (WFC.N), are possible candidates to acquire CIT units, according to analysts.

"The most likely outcome for CIT is to sell off what they can, run off what they can't, then clean up the tag-end pieces by selling to a GE-type of company," said Egan.

(Reporting by Elinor Comlay; Editing Bernard Orr)