Even as financial shares led a stock market rally on Thursday, the crisis in the credit markets threatened to engulf one of the nation’s largest commercial finance companies.
The CIT Group, a century-old company that lends money to small businesses and midsize corporations, was forced to draw on $7.3 billion of emergency bank credit lines. Its shares and bonds plummeted.
CIT, whose businesses range from making student loans to financing purchases of airplanes and railroad cars, announced that it would try to sell some assets or businesses to raise cash and repay its debts. Analysts said the tightening credit squeeze could drive the entire company into the arms of a suitor.
The developments at CIT suggest that the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies.
For the first time since the Depression, the Fed has extended credit directly to securities firms in an effort to stabilize the capital markets. The central bank also expanded the types of collateral that firms can use in buying Treasury securities at a government auction next week. The moves helped shore up confidence in the financial system and set off a rally in shares of banks and brokerage firms.
But unlike banks and now Wall Street firms, commercial lenders like CIT cannot borrow from the Fed. And also unlike banks, which use customer deposits to finance the loans they make, lenders like CIT depend almost solely on the capital markets to raise money.
Shares of CIT plunged almost 45 percent in heavy trading on Thursday morning before rebounding during the afternoon amid the broad rally in financial shares. CIT closed down $2.01, or 17.3 percent, at $9.63.
“Tapping bank lines of credit for financials is viewed as very much a rainy day” solution, said Richard Hofmann, an analyst for CreditSights, an independent research firm based in New York. “It’s another blow to confidence in the company. They are in a significantly challenging state.”
In announcing its moves on Thursday, CIT said a “protracted disruption” in the credit markets and ratings downgrades meant that it could no longer secure short-term debt financing to pay loans. As a result, CIT said it would draw upon backup financing and might have to sell certain businesses. Analysts, however, said CIT executives might be forced to sell the entire company.
CIT prospered when credit was easy. But its fortunes began to plunge last summer as the credit crisis that began in the market for subprime home mortgages started to spread. The company posted a loss of $132.2 million last quarter, in part because of bad investments linked to subprime home loans. Meanwhile, the credit market crisis has made it difficult for CIT to issue bonds and commercial paper, or short-term IOUs.
Struggling to raise money in the markets, CIT drew upon that entire emergency credit line on Thursday after its troubles intensified. This week, Moody’s Investors Service and Standard & Poor’s reduced CIT’s credit rating, making it even more difficult for CIT to raise money by selling short-term notes to big money market funds, which are typically barred from buying securities that lack high ratings.