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CIT may struggle to find buyers for aircraft, railcar units

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CIT Group Inc., trying to avoid collapse by selling assets, may get lowball bids for railroad and aircraft leasing units as competing sellers, the recession and the threat of bankruptcy drive down prices.

Chief Executive Officer Jeffrey Peek is weighing the sale of the businesses, a person familiar with the deliberations said, in a market where General Electric Co. and American International Group Inc. have failed so far to find buyers for rail and aircraft subsidiaries. New York-based CIT said July 20 it may seek protection from creditors, making it unlikely bids will equal an estimated $2 billion book value, analysts said.

“Buyers might feel CIT is a distressed seller, and as a result of that, they may not want to pay a fair price,” said Sameer Gokhale, a KBW Inc. analyst in New York. Such sales would cut deeper into CIT’s depleted capital, he said.

Analysts and investors speculated Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp. are potential buyers. CIT rebuffed each firm’s bids for some businesses earlier this year, the Wall Street Journal reported last week. CIT spokesman Curt Ritter declined to comment.

CIT, a 101-year-old lender, is aiming to relieve a cash crunch and gain time to devise a permanent rescue. Peek, 62, obtained $2 billion from bondholders and is in the process of adding another $1 billion of financing as he waits to see whether owners of $1 billion of bonds due to mature next month will agree to take a loss. If they do, CIT may ask bondholders to convert some of their debt to equity, according to a person familiar with the matter.

Approval Needed

Showing that investors made sacrifices to put CIT on sounder footing may help persuade regulators to approve moving some businesses into CIT’s banking unit, where they could be funded with deposits instead of bonds, said the person, who declined to be identified because CIT’s plans aren’t public.

The leasing units may be put up for sale because U.S. officials likely won’t approve the transfer of businesses that deal in airplanes and railcars into a regulated bank, the person said. CIT’s factoring unit, which lends to manufacturers, and the trade financing unit could probably be shifted into the bank, the person said. GMAC Inc. and Wells Fargo & Co. are among the banks that have factoring businesses.

CIT received $2.33 billion from the Treasury’s bank rescue fund last year. Efforts to get more U.S. help collapsed July 15 after regulators including Federal Deposit Insurance Corp. Chairman Sheila Bair became concerned that CIT’s worsening prospects would put more taxpayer money in jeopardy, Bloomberg News reported. David Barr, an FDIC spokesman, didn’t respond to a message seeking comment during the weekend.

Holding Bids

Asset sales may not occur until debt holders restructure the company and regulators can see a viable capital plan, another person familiar with the matter said. CIT is trying to determine how much of the remaining unsecured debt can be swapped into equity to improve the company’s financial health, the person said.

Bidders may hold back until a rescue plan is in place because any deals they make could be wiped out by a bankruptcy court, said Scott Peltz, managing director of corporate restructuring in the Chicago office of RSM McGladrey. To protect creditors, judges can undo sales agreements struck in the weeks before a court filing, which makes buyers wary, Peltz said.

CIT’s railcar unit has attracted the most interest from potential bidders, one of the people said. The business includes leases to all U.S. and Canadian railroads with annual revenue of more than $250 million, and includes cars used to ship grain and agricultural products, cement, coal, lumber and auto parts. KBW’s Gokhale said book value may be $500 million to $650 million.

Limited Appeal

The aerospace and aircraft leasing portfolio totaled $8.1 billion and 294 aircraft with an average age of five years, the lender said in its 2008 annual filing, and the fleet has a value of about $10.1 billion, according to Wells Fargo analysts Sam Pearlstein and Gary Liebowitz. The business has an estimated book value of $1 billion to $1.3 billion, Gokhale said.

“There’re very few people with the capital and the interest to take on these assets,” said Jim Sinegal, an analyst with Morningstar Inc.

GATX Corp., the Chicago-based lessor of freight cars, backed away from buying more in October, saying prices were too high. GATX had discussed a $3 billion bid to purchase General Electric’s rail services, Bloomberg reported in August.

GATX spokeswoman Rhonda Johnson and Leucadia’s spokeswoman Laura Ulbrandt didn’t return calls for comment.

Buffett’s Rail Holdings

Buffett, the billionaire investor who runs Berkshire, told Fox Business Network July 24 “it’s conceivable” his Omaha- based company might wind up with CIT units. “I’m not on the inside on it,” he said. The factoring unit that finances small and medium-sized manufacturers will go to someone else, he said.

Berkshire agreed in December 2007 to buy Marmon Holdings Inc., the Pritzker family’s conglomerate that included a 61,000- car railroad leasing subsidiary. Berkshire also holds about 23 percent of Burlington Northern Santa Fe Corp. and was among the top 10 holders of Union Pacific Corp.

“This would be a good fit for Berkshire, given Warren’s affinity for railroads,” said Frank Betz, a partner at Carret Zane Capital Management, which owns Berkshire shares. “It’s not below Warren to swim around in the same waters as the wounded fish and gobble them up.”

Peek offered assets including the rail unit at least once before when CIT ran short on cash, telling investors in March 2008 that such sales might raise $7 billion. CIT received bids for the rail unit that Peek said in May could raise $3.5 billion. By September, the plan had been scuttled, with Peek saying CIT had raised enough cash elsewhere and calling the rail unit a “crown jewel.”

Aircraft Prospects

CIT’s aircraft unit also may sell at a distressed price based on bids coming in for AIG’s International Lease Finance Corp., analysts said. New York-based AIG put ILFC up for sale at the beginning of the year as part of a plan to sell businesses to repay parts of a $182.5 billion U.S. bailout. It’s in talks with private-equity firms over a sale of the unit at a discount to ILFC’s $7.8 billion book value as of March 31, people familiar with the matter said.

That may rule out ILFC as a buyer for CIT’s unit, Gimme Credit LLC analyst Kathleen Shanley said in an e-mailed statement. Fairfield, Connecticut-based GE, which also deals in aircraft leasing, “might not have the stomach for an acquisition of this size, either,” Richard Aboulafia, an analyst at Teal Group in Virginia, said in an interview.

“There might be other international players seeking to expand their leasing business,” Aboulafia said. “CIT could give them a major presence without the risks and difficulties of digesting a lessor as big as ILFC.”

Opening Offers

Given the reaction to ILFC’s sale, bidding for CIT’s unit will probably start below book value, Shanley said, and the recession may keep bids low.

“This hasn’t been a great year for the airline industry, and there are concerns about the risk for bankruptcies, lower demand and pressure on lease rates as old leases roll off the books and must be renegotiated,” Shanley said.

Source: Bloomberg

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