CIT Future Looks Bright, for Bondholders

NEW YORK (TheStreet) -- CIT Group (CIT Quote) bondholders are likely to make a lot of money, regardless of which avenue the troubled company pursues to revamp its funding model.

CIT, following the successful tender offer it announced Monday, seems likely to avoid bankruptcy. The six money managers that extended $3 billion worth of credit to the company last month are presumed to own a lot of CIT's debt, and their endgame appears to be to a strategy known as "loan to own." In other words, they buy up a controlling position in the debt and force the company to convert it to equity.

Representatives from that group, which, according to reports by Bloomberg and The Wall Street Journal, include Pacific Investment Management Co., Centerbridge Partners, Baupost Group, Capital Research & Management, Oaktree Capital Management and Silver Point Capital, either declined to comment or did not return calls.

What the Fed: The CIT Carcass

Another influential party that had a strong interest in keeping CIT out of bankruptcy is the U.S. Treasury Department, argues Dwayne Moyers, CIO of SMH Capital Advisors, which owns about $100 million worth of CIT bonds, representing a roughly 5% allocation in his higher-risk accounts. The Treasury invested $2.3 billion in CIT in December, through the Troubled Asset Relief Program.

CIT looks like it can be very profitable if it can clean up its balance sheet, and that prospect of future profitability ought to be an incentive to bondholders to convince them to accept a slug of equity in exchange for forgiving some of CIT's debts.

Bond research firm Creditsights argues that CIT's business model, which in good times involved borrowing at around 6% and lending at about 9%, is no longer viable. But if CIT swaps enough of its debt for equity, there is no reason it should not eventually be able to access unsecured markets. Goldman Sachs (GS Quote) , Wells Fargo (WFC Quote) and even Citigroup (C Quote) have been able to do that, and while they are undoubtedly helped by the fact that they are perceived to have an implicit government guarantee, other companies without that guarantee have also been able to issue unsecured debt. Watson Pharmaceuticals (WPI Quote) just did that Tuesday, for example, paying a coupon of 6.125%. Thomson Reuters shows more than 40 unsecured bond issues by high-yield companies this year.