CIT -25% (oT)

March 20, 2008, 11:26 am
CIT Group Squashed (CTIG)
Posted by David Gaffen

Each day, another company is getting kicked around by investors. Today’s victim is CIT Group, where shares are down 24% in the wake of a pair of downgrades from the major credit rating agencies. It’s the same old song, too — concerns about the company’s funding costs, and moreover, ability to continue to fund itself.
CIT is a commercial financing company but does not have a capital base as banks do, so it depends on ongoing borrowings to finance its lending activities. Recent turmoil in the credit markets has impacted the firm’s ability to borrow unsecured debt — it instead has had to start borrowing more secured debt, that is, debt backed by company collateral, which constrains the company’s ability to lend money, and increases borrowing costs.
“CIT’s reliance on confidence-sensitive wholesale funding, primarily institutional unsecured debt, is a principal constraint to its credit profile,” wrote analysts at Vontobel Credit Research, in an overnight commentary. Moody’s Investors Service and Standard & Poor’s have both recently downgraded shares, and Fitch is considering a downgrade as well.
Other analysts stressed a similar point as Vontobel — the confidence issue. In large part, lack of confidence brought down Bear Stearns, and has been at the forefront of the massive retreat from financial institutions by shareholders and lenders. Lehman Brothers analysts peg this week’s selling to “fear and selling begetting more selling,” and says “longer term funding abilities will depend on the confidence in the credit markets as we suspect will the performance of CIT’s stock.”
Today’s selloff puts shares down 64% on the year.

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