Monday, July 20, 2009

Possible CIT deal with bondholders

CIT's prospective $3 billion two and a half year loan from bondholders would keep it afloat for now, be wonderful news to many retailers and their vendors, and buy time and hope for a better solution. At three month LIBOR plus 10% the loan will drain all returns the company can muster, if any, into the fixed income market. The 100% rise in CIT stock today to $1.40 is simply a trader's relief rally given the view that bankruptcy was imminent late last week. It is not a wise bet on any return to shareholders any time soon, if ever, if the details of this rescue are correct.

Why would bondholders throw good money after bad in a case where the business model of CIT is no longer viable and the existing credit risk is huge. It's a play to save value in existing positions that could be decimated and to give time to find a buyer with a deposit system that can support the company's business long term. Two and a half years is a reasonable window within which that could happen, and investment bankers will be all over the opportunity. Bondholders could come out whole with interest on the $3 billion rescue and many more cents on the dollar on the legacy bondholdings. Dream of dreams, they could come out whole and even shareholders would participate in a deal.

Those possibilites are all an elusive recovery away, and for now the probable salvaging of CIT adds some stabilization to a segment of the economy, small commercial retail vendors, that could hardly stand another hit.


Anonymous kf said...

All good intentions aside, one day later it looks increasing likely that CIT will go into bankruptcy, the debt deal will fail. But if JPM and Goldman can possibly, and immediately arrange debtor-in-possession lending under bankruptcy protection, the company could continue to serve its clients, which is really important right now.

5:06 PM  

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