Vale CIT

CIT Group Inc., remained at the centre of attention in financial markets last week. At first, it appeared that it would be rescued by the FDIC with a guarantee of its debt, but on Thursday the news broke that there would be no rescue: the company was not systemically important. This, no doubt, would have pleased those that are now more vociferously arguing that banks must be allowed to fail and moral hazard be avoided.

The company was still in talks with bond holders and investors and potential lenders over the weekend in a bid to continue trading.

Ratings agencies moved to catch up with the events at CIT. Following the rating action by Fitch reported last week, S&P and Moody's downgraded CIT twice and Fitch moved again too. Fitch has been the most bearish of the rating agencies, moving its issuer default rating on CIT to 'C' to indicate that default of some kind appears imminent or inevitable.

Moody's and S&P moved their long-term ratings to 'Ca' and 'CC', respectively but nevertheless are also of the view that default or bankruptcy is likely in the near term. Interestingly, S&P left its rating on CreditWatch with negative implications but Moody's assigned a stable outlook to its rating.

Moody's affirmed the 'Baa1' long-term issuer rating assigned to Spark Infrastructure but revised the outlook to negative from stable. Moody's is concerned that distributions from the operating companies and bond issuers, ETSA, Powercor and Citipower, could reduce beyond 2010. The possible reduction being due to higher capital expenditure levels; some uncertainty around regulatory resets over the next 12 to18 months; and a potential decline in Powercor's distribution level following a period of debt increases as part of its recapitalization plan.

The 'A3/Stable' ratings assigned to ETSA and Powercor were not affected. Citipower is not rated.