CIT Debt Prices Signal Concerns Exchange May Fail

CIT Group Inc. bond and credit- default swap prices show that investors are speculating the 101- year-old commercial lender’s offer to exchange about $29 billion of its debt won’t prevent it from filing for bankruptcy protection.


Bonds due within the next few months dropped, moving closer in price to longer-dated obligations, a sign that bondholders aren’t convinced the company will be able to restructure outside of bankruptcy court as $1.15 billion of debt comes due by year- end.

CIT Chief Executive Officer Jeffrey Peek is seeking to cut at least $5.7 billion of debt through a swap of unsecured obligations for preferred shares and new secured notes maturing later. Should the exchange fail, the lender will seek protection from creditors through a pre-packaged bankruptcy, the company said yesterday in a statement.

“We believe CIT may need to reduce its debt burden by approximately $9.3 billion to regain access to the unsecured capital markets,” CreditSights Inc. analyst Adam Steer said in an e-mail yesterday. By targeting $5.7 billion, “we question whether CIT is improving its profile enough,” he said.
Tim Lynch, a CIT spokesman, declined to comment on the exchange.

The lender needs to cut debt after posting more than $5 billion in losses during the past nine quarters and losing access to the unsecured debt markets it relied on for funding. About $9.14 billion of CIT loans and bonds mature through 2010, according to data compiled by Bloomberg. The company has $43 billion of loans and bonds, Bloomberg data show.




Exchange Offer

Under the exchange offer, investors holding bonds closest to maturity will get more new debt, while those with notes due later will receive proportionately more equity, according to a filing with the Securities and Exchange Commission today.

The restructuring plan will also include negotiating a new or amended secured credit facility and easing the terms of its revolving bank lines, according to the filing today. CIT may receive a loan of about $6 billion as soon as next week from bondholders that provided $3 billion of emergency financing in July, according to a person familiar with the matter. The company said in its filing that if it obtains amendments, it can increase that $3 billion financing to between $6 billion and $9 billion.

Note Prices

CIT’s $300 million of 6.875 percent notes maturing on Nov. 1 dropped 4.5 cents to 73 cents on the dollar as of 3:16 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company’s $750 million of 4.25 percent notes due in February fell 2.5 cents to 68.5 cents on the dollar at 3:50 p.m., and the $675 million of 5 percent bonds maturing in February 2015 rose 0.44 cent to 65.2 cents on the dollar at 4:46 p.m.

“To do what they want to do out of court, they need very high consent levels to eliminate the problem of holdouts,” Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said this week before details of the plan were released.

The annualized amount that credit-default swaps traders demanded to protect against a CIT default for three months climbed more than five-year protection, according to CMA DataVision, signaling that traders were bracing for bankruptcy.

Credit-Default Swaps

Credit-default swaps protecting against a default through Dec. 20 have jumped 8.25 percentage points in the past three days to 30.25 percent upfront, according to CMA DataVision, while contracts for five years have climbed 4 percentage points to 38 percent.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

CIT is also asking creditors to approve a pre-packaged bankruptcy if it misses the exchange target, according to yesterday’s statement.

Advisers to the bondholder steering committee, which provided $3 billion of emergency cash in July, told CIT that holders of $10 billion in unsecured debt have “indicated their intention” to swap their debt or vote for the prepackaged bankruptcy, according to yesterday’s statement.

Exchange Terms

CIT bondholders will receive between $700 and $900 of new debt plus between 0.41 and 3.26 of new preferred shares for every $1,000 of existing debt tendered, the company said in the SEC filing today. Holders of the company’s most-junior securities will receive either 2.04 or 4.07 new preferred shares for every $1,000 of notes swapped and no new debt.

Bondholders will own 94 percent of the company, assuming 100 percent of existing notes are exchanged, according to the filing. The new preferred stock will have a liquidation preference of $1,300 per share and owners will be entitled to 87.5 votes per share on matters put to stockholders for vote, CIT said.

The exchange offers, which have specific reduction targets for debt maturing by 2012, will expire on Oct. 29, CIT said. The company could emerge from a pre-packaged bankruptcy within 30 days to 60 days of that date should the offers fail, a person familiar with the matter, who declined to be identified, said Sept. 30.

Franchise Value

“This plan maximizes franchise value and can be executed quickly and effectively through a series of voluntary debt exchange offers or an expedited in-court restructuring process,” Peek said in the statement. “Upon completion of either alternative, CIT will be a well-funded bank-holding company with a strong capital position and market-leading franchises.”

CIT had to come up with a restructuring plan “acceptable” to the majority of the bondholder steering committee by Oct. 1, the company said in an Aug. 17 filing.

Shares in CIT rose 11 cents, or 10 percent, to $1.17 in New York Stock Exchange composite trading. The shares, which traded at more than $61 each in February 2007, have lost 74 percent this year.
CIT finances about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the clothing chain in Bellevue, Washington, that is operating under bankruptcy protection. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier.

The company is “targeting a capital structure with significantly less leverage and establishing capital ratios well in excess of our regulatory standards and in line with the most financially sound of our peers,” the lender said yesterday in a regulatory filing, “positioning the company for a return to profitability and investment-grade ratings.”

CIT’s directors, at the request of the bond steering committee, have hired recruitment firm Spencer Stuart to find new members to add to the current board or to replace those who “may decide to step down,” the filing said. The Federal Reserve will review new candidates for the board.

- Via Bloomberg