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UPDATE: CIT-go Into Bankruptcy? Yes…and American Taxpayers Likely To Lose $2.3 Billion

Posted by Larry Doyle on November 2nd, 2009 9:08 AM |

Did the American taxpayer unnecessarily take a $2.3 billion hit on financing provided to the now bankrupt entity known as CIT? You bet. It’s only money we don’t have, right? This is also true.

In the midst of so many other dramatic developments on our global economic landscape, people may lose sight of the fact that the handwriting was on the wall ten months ago for this middle market lender. That bankruptcy handwriting was crystallized this past July. I addressed the likelihood in my commentary of July 21st, “CIT-go Into Bankruptcy?”, and posed the following questions at that time:

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.

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

> What did the $3 billion financing accomplish?

> Were certain unsecured creditors just abused by this transaction?

> Are CIT shareholders about to be wiped out?

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

Now let’s review the particulars we learn about the prepackaged bankruptcy filed over the weekend by CIT. Bloomberg provides details in CIT’s Bankruptcy May Help Bondholders and Erase Taxpayers Stake:

CIT Group Inc.’s decision to seek court protection probably will keep money flowing to bondholders and 1 million customers of the 101-year-old commercial lender. Shareholders and taxpayers won’t be as fortunate.

CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.

The question begs as to why the wizards in Washington allowed CIT to convert to a bank-holding company last December in order to receive TARP funds. In my opinion, the lack of discipline displayed by the Washington crowd in this CIT bankruptcy is rampant across a wide number of other situations. Washington neither has the political will nor courage to truly protect taxpayer interests.

I firmly believe CIT will be the first of many bankruptcies in which Washington’s ploy to “extend and pretend” entities which are already toast ultimately cost American taxpayers more in the long haul.

LD

Related Sense on Cents Commentary:
No ‘Get Out of Jail Free’ Card for CIT (July 10, 2009)
Random Thoughts on CIT (July 16, 2009)
CIT Gets ‘Don Corleone Financing’ (July 22, 2009)

CIT Gets ‘Don Corleone Financing’

Posted by Larry Doyle on July 22nd, 2009 12:11 PM |

Desperate companies, just like desperate individuals, will take desperate measures when pushed to the brink.

We clearly see this as the terms of the CIT financing arranged over the weekend are released. Bloomberg exposes this loan sharking in reporting, CIT Hit With Interest Rate More Than 25 Times Libor:

CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to the creditors and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.

“The terms are egregious,” said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. “They ripped the faces off everyone with these terms.” (LD’s highlighting)

The rate on the financing was initially released as 10.5%. That level looks downright cheap compared to these terms.

The question begs, though, whether even under these terms CIT will survive:

CIT, led by Chairman and Chief Executive Officer Jeffrey Peek, said in a regulatory filing yesterday that the loan doesn’t solve the funding challenges and it may be forced to seek bankruptcy protection unless holders of $1 billion in floating-rate notes due Aug. 17 accept 82.5 cents on the dollar for the debt.

I addressed the concerns CIT immediately faces in writing yesterday “CIT-go Into Bankruptcy?” A question I raised:

> 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.

I obviously stand corrected in terms of the rate on the loan.

The outlook for unsecured creditors (customers who have pledged assets/receivables and other bondholders) remains decidedly challenged as Bloomberg asserts:

The company has said its bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents.

“As a CIT unsecured bondholder you’re better off than you were on Friday, but if they go into bankruptcy you’re not going to be too happy other holders jumped ahead of you,” Cohen said.

Bondholders that didn’t participate in the rescue financing may fare worse in a CIT bankruptcy because so much of the assets are pledged as collateral, said Adam Cohen, founder of debt research firm Covenant Review LLC in New York.

In regard to the secured creditors involved in this specific $3 billion financing, they are going to do just fine. Make no mistake, this financing was no mission of mercy, nor should it be, but as Bloomberg highlights:

“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”

Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”

What will this loan shark financing do for lending to small and medium sized companies? Well, do you know any businesses which can afford to pay 14% so CIT can make .50% on this financing?

LD

CIT-go into Bankruptcy?

Posted by Larry Doyle on July 21st, 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? (more…)

Random Thoughts on CIT

Posted by Larry Doyle on July 16th, 2009 4:25 AM |

What are the ramifications of CIT going into bankruptcy? Will it hurt our economy? Will businesses suffer? Will there be a ripple effect? Will credit be available? Are there unintended consequences? Are there any outfits who benefit from CIT’s bankruptcy?

Bloomberg reports, U.S. Cites ‘High Threshold’ for Aid as CIT Denied Assistance.

As I think this situation over, I am compelled to shed further light on this institution.

1. Just what exactly was CIT’s niche and role in the economy? CIT provides an overview of The Vital Role of CIT.

2. Will the economy suffer if CIT declares bankruptcy? Of course. Anytime an outfit the size of CIT goes under, it hurts. CIT is a 100 year old company with deep and longstanding relationships well developed over time. Those relationships and financial exposures are not recovered immediately.

3. What business lines did CIT have? CIT Businesses include: corporate finance, trade finance, transportation finance, vendor finance, CIT Bank, Insurance Services.

Additionally, my instincts tell me the following:

1. Looking at that lineup of businesses, what other companies have these same business lines? GE Capital, Bank of America, Citigroup, AIG. Other commercial banks and insurance companies have them as well, but my point is that companies with significant support from Uncle Sam should actually benefit from CIT’s downfall. Don’t think for a second that Washington has not been talking to these companies telling them to immediately engage traditional CIT customers.

From a similar standpoint, who benefitted from the downfall of Bear, Lehman, and Merrill Lynch? None other than Goldman Sachs and JP Morgan simply due to lessened competition.

If and when CIT fails, and other financing outlets as well, I think it is highly likely that firms currently ‘too big to fail’ will only get bigger. What does that mean for our future economic landscape?  This scenario with CIT is likely to play out with plenty of other smaller financing firms as well.

In layman’s terms, do the ‘too big to fail firms’ have all the leverage, literally and figuratively?

2. It is not widely broadcasted, but CIT had gotten involved in sub-prime financing over the last 4-5 years. They were certainly not one of the larger players but their presence is just another indication of how companies were chasing profits wherever possible.

3. Who within the government would have borne the brunt of losses from CIT if Uncle Sam had chosen to backstop the company? Sheila Bair and the FDIC. Sheila has been picking and choosing her spots with her support knowing that there are plenty more banking institutions poised to fail.

4. Does Uncle Sam have any exposure currently to CIT? Yes. CIT Bank, formed last year, was provided $2+ billion in TARP funds. In a bankruptcy proceeding, the taxpayer will likely only get a return of some small percentage of that money.

5. Is this a win for capitalism? Yes and no. Yes, if in fact the playing field was currently level. No, from the standpoint that the playing field is not level.

I have very mixed feelings. On one hand, I am not in favor of bailouts. On the other hand, how do companies compete with other institutions flush with Uncle Sam’s cash and backing?

Thoughts and comments always welcome.

LD






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