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CIT-go into Bankruptcy?

Posted by Larry Doyle on July 21, 2009 5:07 PM |

I thought CIT pulled the rabbit out of the hat in arranging $3 billion in financing yesterday. What happened? Let’s navigate this institution and shed some light where Wall Street may care to keep us in the dark.

The Wall Street Journal reports CIT Rescue Deal May Not be Enough to Ward Off Chapter 11:

CIT Inc.’s $3 billion rescue package from bondholders may not be enough to protect the lender from seeking bankruptcy protection, the company said in a filing Tuesday with the Securities and Exchange Commission.

So many additional questions remain, including:

> Why is the stock plummeting and why are analysts speculating it may very well file for bankruptcy?

CIT is seeking to reduce its debt burden in a tender offer for $1 billion of its bonds. CIT said in the filing if it doesn’t get enough of its outstanding floating-rate senior notes due Aug. 17 tendered, it may need to file for bankruptcy protection, absent additional financing.

CIT also said the government judged that the company needs about $4 billion in additional regulatory capital, including an extra $2.6 billion in tier-one capital, following a stress test.

Shares of CIT fell after the filing and were down 26% in recent trading at 93 cents a share.

> What did the $3 billion financing accomplish?

The cash injection should help the company deal with $1 billion of debt maturing in August, and also provide some fresh funding for making new loans.

> Were certain unsecured creditors just abused by this transaction?

Though neither CIT nor the creditors providing the $3 billion in new capital will publicize it, these lenders hold secured debt and as such they just stepped in front of a wide array of unsecured creditors in a likely bankruptcy. Who are some of these unsecured creditors? Small and mid-sized retail outlets and franchises which pledged receivables for future credit.  CIT will pay 10.5% and pledged $30 billion in face value of assets/receivables as collateral for the $3 billion loan.  Will the small and mid-sized companies be able to tap their credit lines? Great question.

> Are CIT shareholders about to be wiped out?

Highly likely. Why? CIT is currently trying to swap outstanding debt for equity in order to minimize future interest expenses. If they were able to accomplish that swap, existing equity shareholders would be significantly diluted.  If CIT does not get the debt for equity swap done, then it is off to bankruptcy court and shareholders will assuredly be wiped out. Either way, you do not want to be a CIT shareholder.

> Will CIT be a precursor for other lenders to the middle and smaller markets?

It may very well be. These outfits are deemed not too large to fail, they are filled with an ever increasing portfolio of delinquent loans, and have limited access to new capital. Larger firms will likely pick off the divisions of CIT or other lenders that they may want and say good night. This scenario is why so many smaller banks are projected to fail over the balance of the year. For precisely that reason, FDIC Chair Sheila Bair does not want to provide a lifeline to CIT.

While Goldman Sachs, JP Morgan Chase, and other beneficiaries of Uncle Sam’s largesse reap the benefits of that money, the real economy for the greater part of America will continue to struggle to make ends meet.

LD

The CITGO sign above is merely a play on words. Red Sox fans cherish that sign, which has no affiliation with CIT.

  • kbdabear

    A few questions if I may;

    What is being hidden from us regarding the TRUE state of the big banks balance sheets? We’re being told by the Fed, the government, and the MSM that the banks are stabilizing and some are even returning to profitability

    Is there a plan for the government to take toxics off the hand and bury them into an off-budget black hole?

    Is there another huge nasty surprise coming like the one last September? How will they claim that they didn’t see it coming and they’re “SHOCKED”?

  • Larry Doyle

    kbdabear….the fact is the toxic assets remain embedded on and off the balance sheets of these banks. The underlying loans backing those assets continue to default at an increasing rate.

    What is going on here is nothing short of a race between ‘quarterly earnings’ generated by the banks versus writedowns or actual losses (via default) on these assets.

    I wrote about this very topic in “How Will Banks ‘Manage’ Earnings”

    There is no plan that I know of other than the ongoing snail’s pace of the TALF and PPIP.

    I do not think there is an enormous surprise. I think it will merely be an economy operating with a severe case of ‘walking pneumonia.’

    What fun…






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