2nd UPDATE: Pimco Has Quit CIT Bondholder Steering Committee
October 07 2009 - 5:58PM
Dow Jones News
The future of CIT Group Inc. (CIT) grew murkier Wednesday after
the disclosure that bond fund giant Pacific Investment Management
Co. had quit a steering committee that's trying to prevent the
commercial lender from collapse.
Pimco, the world's biggest bond fund and a unit of Allianz SE
(AZ), sold off a major portion of its holdings in CIT debt,
according to people familiar with the matter. This forced Pimco off
a committee made up of the company's largest bondholders.
The move was seen as another blow as CIT struggles to end months
of uncertainty about its future. The century-old lender is
scrambling to convince creditors to back sweeping debt
restructuring, or the company will file for a pre-packaged
bankruptcy.
"It's quite possible that the restructuring is unraveling," said
Scott Peltz, managing director of restructuring at consultancy RSM
McGladrey in Chicago. "There are so many moving pieces and
different positions, that it's very difficult to think CIT would
accomplish this out of court and the fact that Pimco is no longer
involved would further that thought."
CIT bonds dropped across the board, while the cost of protecting
the debt against a default rose, suggesting that bondholders aren't
betting that the company will successfully restructure outside
court. CIT shares also fell, closing down 1.7% at $1.15.
The increased potential for a bankruptcy is being closely
watched because it could cause ripple effects throughout the
economy and financial sector. The company has an estimated $75
billion in assets, and provides critical short-term financing to
about one million small companies.
The loss of Pimco on the committee also comes amid louder calls
for bondholders to reject the exchange. The aim of the exchange is
to cut at least $5.7 billion off CIT's roughly $31 billion of bond
debt.
Analysts at Egan-Jones Ratings Co. and CreditSights are warning
bondholders that the debt exchange has very little hope of success.
And, perhaps bondholders' investments would be worth more if the
company is broken up.
The proposal falls short of fixing CIT's broken funding model,
said Sean Egan, managing director of Egan-Jones. "They would be
back round the negotiating table within six months to 18 months,"
he said.
News of Pimco's departure from the steering committee follows a
similar move by Boston-based Baupost Group LLC, which left after
the largest bondholders put together $3 billion in emergency
funding. The committee now consists of Centerbridge Partners LP,
Oaktree Capital Management LLC, Capital Research & Management
Co. and Silver Point Capital LP.
Baupost left because the firm didn't want to sign a
non-disclosure agreement that would have restricted them from
trading CIT debt, according to one person familiar with the matter.
The firm declined to comment.
Asked about the departure of Pimco, CIT spokesman Tim Lynch said
in an e-mail "while we cannot comment on the membership of the
lenders steering committee, we are grateful for their support."
Investors have until 11:59 p.m. Eastern time on Oct. 29 to
tender their bonds under the restructuring plan. The insurance
prices on the debt indicate that investors aren't betting that CIT
will avert bankruptcy.
"Pimco was a major player and without them it looks like the
restructuring is falling apart," said Michael Gallo, Jr., partner
at law firm DeCotiis, FitzPatrick, Cole & Wisler, and head of
the Finance Law practice group.
That concern was reflected in the credit-default market late
Wednesday. It cost investors $4 million upfront plus a $500,000
annual fee to insure $10 million of CIT's bonds against a default,
according to CMA DataVision. That indicates an acute level of
distress and is up from $3.8 million upfront earlier Wednesday.
-By Kate Haywood and Joe Bel Bruno, Dow Jones Newswires;
212-416-2218; kate.haywood@dowjones.com.
(Mike Spector of The Wall Street Journal contributed to this
article.)