2nd UPDATE: CIT Stock, Short-Dated Bonds Up On Rescue Hopes
July 17 2009 - 3:09PM
Dow Jones News
CIT Group Inc.'s (CIT) stock and short-dated bonds are sharply
higher Friday while the cost of default protection on its debt
remains at severely distressed levels as investors place bets on
the lender's survival.
Efforts are under way to secure funding from bondholders and
banks that would help keep the company afloat. Bondholders held
calls Thursday to discuss options for the company, including
whether to swap some of their claims for an equity stake to cut
CIT's debt pile.
Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM),
Morgan Stanley (MS), and Barclays PLC (BCS) are also in early talks
to provide $2 billion to $3 billion in financial help for CIT,
according to people familiar with the matter. This would include
new money, rather than simply rolling over existing debt.
This money could either be used to keep CIT out of court or
become debtor-in-possession financing in a worst-case scenario.
CIT may need as much as $6 billion in funding to avoid filing
for bankruptcy protection after talks with the federal government
over a rescue package failed earlier this week.
But any deal to save the company will depend on the government
allowing CIT to transfer its unencumbered assets to its
deposit-taking bank.
"All of these things have to come together for CIT to skirt this
problem in the near term," said Chris Munck, high-yield trader at
B. Riley & Co.
Discussions on any financing are still fluid, according to one
bondholder, who declined to be named.
CIT is an important lender to small and medium-sized businesses.
But with only 1% of the U.S. lending market, it isn't viewed as too
big to fail in the government's eyes, which gives CIT fewer
options. It has reported losses for eight quarters in a row and has
been shut out of the debt markets, on which it relies to fund its
businesses.
Although a bankruptcy of CIT wouldn't represent a systemic risk
to the economy, it would "still [be] disruptive," said Edward
Altman, professor at New York University's Stern School of
Business. "Frankly, the lending to [small and medium enterprises]
is perhaps best suited to others, since CIT botched it," Altman
said.
CIT's short-dated bonds were higher Friday, according to
MarketAxess, as market participants bet CIT's bondholders will
reach a deal. That could open the way for some kind of help from
the government.
The floating-rate notes due August 2009, the most actively
traded bond, were recently up 10.25 points at 68 cents. That's a
touch lower than levels seen earlier in the session when these
bonds gained 13.5 points at 70.5 cents.
CIT shares were also higher, up 43 cents, or 105%, to 84 cents
recently.
"There's definitely speculation about some kind of bond exchange
over the weekend, but it's just speculation," said Pete Brady of
Broadpoint Capital.
MarketWatch reported late Thursday that a small group of
investors holding several billion dollars of CIT debt formally
hired law firm White & Case. The group is willing to put up
roughly $2 billion, and White & Case has lined up a bank that
has agreed to be the agent for such an investment, according to the
report.
Like the common stock, CIT's Series A and Series C preferred
stock soared Friday on the potential financing deal, after
cratering Thursday on the risk of impending bankruptcy. The Series
A was up 52.2% at $1.37 apiece, and the Series B was up 138.4% at
$3.79 in recent trading.
Despite the gains, the A preferreds remain far below their $25
liquidation preference, or a technical way of saying par value, and
the B shares are just 7.4% of the $50 investors are slated to
receive at maturity. The 6.35% payout on the Series A, at today's
price, gives it a 115.8% dividend yield, while the 8.75% paid on
the Series B gives it an effective 115.4% yield.
Another CIT preferred, a $25 mandatory convertible issued in
2007 and due next year, fell 8% to $8.75, after spiking Thursday.
This preferred has the unusual distinction of ranking alongside
senior debt in the corporate hierarchy, and investors are playing
this as a cheaper way than CIT bonds to participate in any
bankruptcy restructuring. Its 6.35% annual payment gives it a yield
of 22.2% today.
But in the credit-derivatives market, the cost of protection on
CIT debt remains firmly at distressed levels, indicating doubts a
rescue plan will be forthcoming. Longer-dated bonds were also
lower.
Insuring $10 million of CIT's senior bonds against default for
five years was around 44.56 points upfront, according to Phoenix
Partners Group. That's against 49 points upfront Thursday. It now
costs investors $4.45 million upfront plus a $500,000 annual fee to
insure this debt.
-By Kate Haywood, Dow Jones Newswires; 212-416-2218;
kate.haywood@dowjones.com
(Andrew Edwards, Joe Bel Bruno, Matthias Rieker and Alistair
Barr contributed to this report.)