In the latest example of a financing company’s willingness to become a regulated entity in exchange for government bailout money, CIT Group applied with the Federal Reserve Board of Governors to become a bank holding company.
If its application is approved, CIT — a commercial lender to small and mid-size market companies — plans to participate in the Treasury Department’s Capital Purchase Program. The deadline for applying to the program is tomorrow.
In addition, CIT Bank, the company’s wholly-owned Utah-based subsidiary, also filed an application to convert its charter from an industrial bank to a state bank.
The Capital Purchase Program, which is part of the broader federally-mandated Troubled Asset Relief Program (TARP), allows banks with liquidity problems to recapitalize their balance sheet by selling stock warrants to the Treasury Department in exchange for a cash infusion.
As a middle market lender that count retailers among its customers, CIT “may have as strong a case to make, if not stronger, than other non-bank financial companies” that have applied for holding company status, write research analysts Sameer Gokhale and Brendan Sheehy of Keefe, Bruyette & Woods. They explain that the cash infusion would allow CIT to continue its factoring activities, which in turn would help retailers find financing. What’s more, smaller companies would reap benefits too, as CIT operates the nation’s largest Small Business Association lender, say Gokhale and Sheehy.
According to the analysts’ calculations, CIT would be eligible to apply for a maximum of $2 billion to $2.5 billion in TARP capital. Further, the research firm reckons that CIT would be eligible for the Temporary Liquidity Guarantee Program, which would potentially allow the lender to issue nearly $10 billion of guaranteed debt.
So far, at least 15 banks have announced that they will participate in the warrant program. Transactions for the first nine have closed, and include: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, Wells Fargo, and Merrill Lynch.
In July, CIT reported a steep drop in operating income for the second quarter, but said it had done significant repair to its balance sheet and was positioned to meet liquidity needs through the end of 2009. In fact, later that month, CIT said it would prepay its $2.1 billion drawn bank credit facility three months in advance of the October 2008 due date. The payment was the initial repayment of the funds borrowed under its credit facilities in March 2008. At the time, CIT told lenders that the remaining $5.2 billion of borrowings have maturities in April 2009, April 2010, and December 2011.
Companies participating in the Capital Purchase Program must adopt the Treasury Department’s standards for executive compensation and corporate governance for the period during which Treasury holds senior preferred shares issued under the program. These standards generally apply to the chief executive officer, chief financial officer, and the next three most highly compensated executive officers.
The compensation criteria includes four main components: ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threatens the value of the bank; requiring clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; prohibiting golden parachute payment to a senior executive; and agreeing not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.
The minimum subscription amount available to a participating bank is 1 percent of its risk-weighted assets, while the maximum subscription amount is the lesser of $25 billion or 3 percent of risk-weighted assets. Treasury plans to fund the bank shares purchased under the program by the end of 2008.
The equity, which are non-voting shares, will qualify as Tier 1 capital, and will pay a cumulative dividend rate of 5 percent annually for the first five years, which will reset to a rate of 9 percent after the fifth year. In addition, the shares will be callable at par after three years.
Under the program, Treasury will purchase up to $250 billion of senior preferred shares from qualifying financial institutions which include controlled banks, savings associations, and certain bank and savings and loan holding companies. The deadline for filing an application is November 14.