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| CIT approaches bankruptcy after striking Icahn, Goldman accords |
| Bloomberg / New York Nov 02, 2009, 00:53 IST |
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CIT Group Inc, the 101-year-old commercial lender seeking to avoid collapse, may file for a prepackaged bankruptcy as soon as today after striking deals with billionaire Carl Icahn and Goldman Sachs Group Inc.
A prepackaged bankruptcy “is probably going to go through,” Icahn said October 30. He will supply a $1 billion loan for “supplemental liquidity” that can be used as bankruptcy financing, the New York-based company said. CIT also said it reached an agreement with Goldman Sachs to keep a credit line open should the lender file for court protection.
The accords were disclosed the day after a deadline passed for CIT to solicit votes in support of either a $30 billion out- of-court debt exchange or a prepackaged bankruptcy. CIT is seeking to reduce debt by at least $5.7 billion after being locked out of credit markets it relies on for funding and posting nine quarters of losses totaling more than $5 billion.
“CIT has gotten its ducks in a row for filing,” Adam Steer, an analyst with CreditSights Inc. in New York, said in a telephone interview. “They can hopefully get out of the bankruptcy court faster, which may be better for debt recoveries.”
Under the prepackaged plan, CIT bondholders will get 70 cents on the dollar in the form of new notes and equity in the reorganised company. If CIT is forced into a “free-fall” bankruptcy, unsecured claims may fetch as little as 6 cents on the dollar, according to Jeffrey Peek, the company’s chief executive officer.
CIT arranged a $4.5 billion term loan that can be used in bankruptcy, the company said October 28. The lender said “through the substantial deleveraging featured in CIT’s restructuring plan, whether completed in or out of court, the company is confident that CIT will emerge as a strong bank-holding company with improved capital, liquidity and earnings potential.”
CIT spokesman Curt Ritter declined to comment October 30.
While CIT said it’s still counting the more than 150,000 ballots, bond and credit-default swap prices show that investors are betting the lender will file for court protection.
Since Peek started the debt swap October 1, the company’s notes due November 3 dropped 12 cents to 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders of the $500 million in notes were offered 90 cents on the dollar in new debt and equity in an out-of-court exchange that expired at 11:59 pm in New York on Oct. 29.
The cost to protect CIT debt against default for five years has risen 4.5 percentage points to 38.5 per cent upfront since September 30, according to CMA DataVision. That means it would cost $3.85 million initially and $500,000 annually to protect $10 million of CIT bonds from default for five years.
The cost of the credit-default swaps implies that traders have priced in an 85.5 per cent chance that the company will default within five years, a standard pricing model used by Bloomberg shows. The model assumes investors could recover 40 cents on the dollar in a bankruptcy proceeding.
CIT dropped 23 cents, or 24 per cent, to 72 cents in New York Stock Exchange composite trading October 30. The shares, which traded at more than $61 each in February 2007, have declined 84 per cent this year.
If the prepackaged plan is approved, the company plans to file for bankruptcy before $800 million of bonds mature this week, according to people familiar with the situation who declined to be identified because the talks are private.
Noteholder Control
Icahn, 73, who says he’s CIT largest bondholder with $2 billion of its debt, initially opposed CIT’s plan, contending the investments were worth more in a traditional bankruptcy. The New York-based investor proposed last week to buy CIT holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they rejected the plan.
CIT’s agreement to “give control to the noteholders” and an accelerated process for appointing directors “significantly improve corporate governance and cash flow protections, and are positive for the company and all noteholders,” Icahn said in a statement Oct. 30, explaining why he changed his vote in favor of the prepackaged bankruptcy.
“The board in general acted responsibly by saying, ‘We’re willing to do this.” Icahn said in a telephone interview.
Icahn also said he’s changing the terms of the tender offer for bondholders who voted against the prepackaged bankruptcy. “Whether or not the Exchange Offer/Prepackaged Plan fails, they will still be protected at $600 per note for 30 days,” the statement said.
Icahn’s Goals
“Icahn had two goals in mind: Influence over the board and participation in the expansion loan facility,” said Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a telephone interview. “He’s won on both counts.”
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’s 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.
Icahn Associates Corp. is the largest shareholder of American Railcar Industries Inc., which depended on CIT for 31 percent of its business as of June 30, according to data compiled by Bloomberg. Icahn is chairman of the St. Charles, Missouri-based railcar maker.
CIT’s agreement with New York-based Goldman Sachs will reduce a $3 billion credit facility to $2.13 billion and keep the line open should CIT file for bankruptcy.
Goldman Sachs Agreement
In exchange, Goldman Sachs received $285 million in termination fees, CIT said Oct. 30 in a filing with the U.S. Securities and Exchange Commission. Under the terms of the two companies’ original agreement, Goldman Sachs would have been due a $1 billion termination payment to close the credit line after a CIT bankruptcy.
The agreements should make the bankruptcy process easier by removing opposition to the bondholder plan, Michael Taiano, an analyst at Sandler O’Neill & Partners LP said in a telephone interview.
“They’re effectively in control and there’s not really a bankruptcy judge that has to approve everything,” he said. “It creates less disruption to the business because you’re in bankruptcy a shorter period of time.”
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