3rd UPDATE: CIT Fate In Balance; Shares, Short-Dated Bonds Up
July 17 2009 - 5:39PM
Dow Jones News
Investors clutched at straws Friday, with CIT Group Inc.'s (CIT)
shares and short-dated bonds sharply higher, as the lender's fate
still hangs in the balance.
Efforts are continuing 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. Another possible debt exchange could involve
swapping unsecured near-term bond maturities for secured debt using
CIT's unencumbered assets, as well as extending the maturity of the
debt.
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. DIP
financing would give the banks seniority over all of CIT's other
creditors. Curt Ritter, a spokesman for CIT, didn't respond to
requests for comment.
Bankruptcy is still on the table if the rescue talks fail,
according to one of the people, who said that a filing could come
early next week.
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.
Harold Reichwald, at Manatt, Phelps & Phillips LLP in Los
Angeles and who represents some of CIT's manufacturing clients,
isn't optimistic about an out-of-court solution for the
company.
"In any case like this, you need speedy resolution," Reichwald
said. "If there is no speedy resolution, there is little chance of
something like CIT succeeding. They need capital, and they need it
immediately to support their business."
CIT's short-dated bonds were higher Friday, according to
MarketAxess, as market participants bet CIT will reach some sort of
deal.
The floating-rate notes due August 2009, the most actively
traded bond, were recently up 13 points at 69.5 cents. CIT shares
were also higher, up 29 cents, or 71%, to 70 cents at the
close.
"There's definitely speculation about some kind of bond exchange
over the weekend, but it's just speculation," said Pete Brady of
Broadpoint Capital.
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.
In the credit-derivatives market, the cost of protection on CIT
debt remains firmly at distressed levels, indicating doubts that 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 44.5 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, Max Murphy, Joe Bel Bruno, Matthias Rieker and
Alistair Barr contributed to this report.)