Pedestrians walk outside CIT headquarters in New York, US, on July 10, 2009.

CIT Group Inc., the century-old US lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure.

It would ripple across the “small and medium-sized businesses who rely on CIT to operate – to pay their vendors, ship goods to their customers and make their payroll,” the documents said. CIT spokesman Curt Ritter declined to comment on the documents.

CIT executives spoke with regulators during the past two days, according to a person familiar with the talks, after its bonds and shares tumbled on concern that the Federal Deposit Insurance Corp. won’t allow the lender into its bond-guarantee program created last year to unfreeze debt markets. CIT may default as soon as April, when a US$2.1 billion credit line matures, according to Fitch Ratings.

“A CIT default would create liquidity issues for the corporate sector,” Ed Grebeck, chief executive officer of debt consulting firm Tempus Advisors in Stamford, Connecticut. “If CIT isn’t doing trade finance and lending, its customers will look to other banks for replacement and from what I’ve seen, they aren’t willing to step up.”

Bonds, shares fall

A failure of CIT, run by Chief Executive Officer Jeffrey Peek, would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.

CIT’s $656 million of 5.125 percent notes due in 2014 fell 4.5 cents on the dollar to 53 cents as of 9:21 a.m. Monday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 20 percent.

The stock declined 36 cents, or 23.5 percent, to $1.17 as of 9:36 a.m. in New York Stock Exchange composite trading Monday. It dropped 46 cents, or 23 percent, last week.

The company, which reported more than $3 billion of losses in the past eight quarters, says it’s hired Skadden, Arps, Slate, Meagher & Flom LLP as an adviser.

New York-based Skadden is known for its work in mergers and acquisitions and bankruptcies. The firm represented BHP Biliton Ltd., the world’s largest mining company, in its $150 billion proposed acquisition of Rio Tinto, and advised Circuit City Stores Inc. in its bankruptcy.

Maturing debt

“Skadden is one of the principal law firms representing CIT,” Ritter said in an e-mail on July 11. “They represent the firm on a wide variety of corporate matters. CIT will not comment on any specific aspect of their engagement.”

Jay Goffman, co-head of Skadden’s global corporate restructuring group, declined to comment on the firm’s work for CIT.

CIT faces $10 billion of maturing debt through 2010 and hasn’t sold corporate bonds in more than a year, according to data compiled by Bloomberg.

Credit-default swaps on CIT rose 2 percentage points to 39.5 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $3.95 million initially and $500,000 annually to protect $10 million of CIT debt for five years. The upfront cost reached the highest since October 17, when it climbed to a record 41.5 percent, according to CMA DataVision prices.

Bondholder protection

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

CIT, which says it was the first to offer credit to help consumers nationwide buy Studebaker cars, funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. CIT says it’s the third-largest US railcar-leasing firm and the world’s third-biggest aircraft financier.

CIT became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the US Treasury.

Source: Bloomberg