CIT Chapter 11 filing may follow bondholder plan

Advisers to bondholders that rescued CIT Group Inc. with a $3 billion loan said creditors should push the company into Chapter 11 bankruptcy after a debt swap next month, according to a person familiar with the matter.

The lenders should require New York-based CIT to restructure its debt through a so-called pre-packaged bankruptcy, even if the company succeeds in swapping 90 percent of the $1 billion of floating-rate notes that come due Aug. 17, Jeffrey Werbalowsky, chief executive officer of bondholder adviser Houlihan Lokey Howard & Zukin, said on a call with creditors yesterday, according to the person.

Investors led by Newport Beach, California-based Pacific Investment Management Co. and Centerbridge Partners LP in New York, are preparing to take more control of CIT, which said in a regulatory filing this week that it may need to file for bankruptcy if it’s unable to exchange the notes. A pre-packaged reorganization could allow the 101-year-old commercial lender to reduce the $7 billion of unsecured debt that matures by June 30.

“A prepackaged bankruptcy shows the world they have a solution to their problems,” said Martin J. Bienenstock, chairman of the restructuring department at law firm Dewey & LeBoeuf LLP in New York. “An open-ended bankruptcy creates uncertainty as to whether the company will survive or will liquidate.”

Should the tender offer, which expires Aug. 14, fail, Houlihan will recommend the bondholders allow CIT to file for bankruptcy before paying the August maturity, said the person, who declined to be identified because the call was private. CIT is offering to buy the notes for 82.5 cents on the dollar.

August Notes

Werbalowsky declined to comment. Andrew Rosenberg, a partner at law firm and adviser Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, and CIT spokesman Curt Ritter didn’t return calls seeking comment.

CIT said in the regulatory filing that the bondholder group agreed to swap all their August notes in the tender. The group owns less than half the securities outstanding, Werbalowsky said on the call.

The securities fell 1.5 cents to 83.75 cents on the dollar yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Its $500 million of 4.125 percent notes maturing in November tumbled 7 cents to 61.5 cents on the dollar, Trace data show.

CIT shares declined 11 cents to 87 cents in New York Stock Exchange trading.

Besides Pimco and Centerbridge, the four bondholders that provided the financing are Los Angeles-based Oaktree Capital Management LLC, Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co. of Los Angeles, and Silver Point Capital LP in Greenwich, Connecticut. London-based Barclays Plc arranged the funding.

$2 Billion Immediately

The group made $2 billion available immediately and promised another $1 billion by the end of the month. Each of the firms that participated owns at least $250 million of senior CIT bonds, according to Houlihan, the person said. To be eligible to participate in the remaining $1 billion of the financing bondholders must hold at least $250 million, the person said.

CIT said in the July 21 regulatory filing that its “existing liquidity” isn’t enough to make the August debt payment and that it needs permission from bondholders who made the loan to use the proceeds to repay the debt. The company, which has lost $3 billion in the last eight quarters, also said it expects to report a $1.5 billion loss for the second quarter.

Collateral Value

Even if CIT fails, the bondholder group will probably make money on the loan because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. The book value of the collateral must be more than five times the amount of the loan and the so-called fair value must be more than triple the debt, CIT said in a filing.

The loan has risen to 105 cents on the dollar since the financing was announced on July 20, according to traders who declined to be identified because the loan market is private. That means the bondholders have profited, at least on paper, on top of the 5 percent fee they charged CIT for the money.

“A friend in need is a friend indeed,” said Richard Coons, a high-yield bond broker at Carolina Capital Markets in Greenwich, Connecticut. “It was structured by the investors, and with those terms other people want in on it.”

Howard Marks, chairman of Los Angeles-based Oaktree, and spokesmen for Barclays and Silver Point declined to comment. Officials at Capital Research, Baupost, Centerbridge and Pimco didn’t return calls.

Loan Terms

Interest on the rescue financing will be set at 10 percentage points more than the London interbank offered rate, which will have a floor of 3 percent. Three-month Libor was set at 0.502 percent yesterday.

The group received the 5 percent commitment fee on the 2.5- year loan, amounting to $100 million for the $2 billion already provided. They will get a 1 percent annual payment on the amount that’s not drawn upon, CIT said in the filing.

If CIT wants to retire the loan early, it must pay a 2 percent exit fee in addition to a prepayment premium of 6.5 percent on the amount it wants to reduce, the filing said. The 6.5 percent will decline to zero over 18 months.

“As their SEC disclosure indicates, CIT wasn’t exactly in a position to drive a hard bargain,” said David Havens, managing director at Hexagon Securities LLC in New York. “It’s a super secured high-coupon loan. It’s so over-collateralized through the security they’ve taken. CIT may have a lot of problems, but the investors buying this at Libor plus 10 percent are well covered.”

Source: Bloomberg

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