CIT Shares Jump on Details of Debt Swap

NEW YORK (TheStreet) --CIT Group(CIT Quote)saw its shares surge Friday after the company disclosed the details of its debt-exchange plan.

The run-up came despite the still looming prospect of a bankruptcy filing by the troubled lender if bondholders reject the plan. The stock was up nearly 14% to $1.20 in midday action on volume of more than 95 million.

By releasing its plan prior to midnight Thursday, CIT avoided defaulting on a $3 billion loan from a group of bondholders including Centerbridge Partners, Oaktree Capital, PIMCO and Silver Point Capital, according to a report from CreditSights, a bond research firm. The equity rally may, at least in part, reflect a measure of bullishness about the removal of that threat, although the stock has been extremely volatile of late, experiencing dramatic price swings on heavy volume.

Under the terms of the exchange offer, bondholders would trade their existing debt securities for a portion of each of five series of newly issued secured notes, with maturities ranging from four to eight years, and/or newly issued preferred stock.

Perhaps reflecting the threat of dilution under the exchange, CIT's preferred series "(CIT-PA Quote)" and "(CIT-PC Quote)" shares were each down sharply. The preferred shares are an interesting class of securities to watch because they also reflect the market's perception of the U.S. Treasury's $2.3 billion investment in the company.

The preferred series "A" shares closed at $11.26 on Dec. 31, 2008, the day the Treasury made its investment. On Friday morning, those shares were sitting at $1.89, down more than 27% for the session and 83% since Dec. 31. The "C" shares were down nearly 15% Friday morning. Linus Wilson, a Professor at The University of Louisiana, argues the Treasury's investment is in even worse shape, however, because it invested at a higher price than the market.

The exchange offers are conditioned upon the amount of CIT's total debt being reduced by at least $5.7 billion. The offers are set to expire on Oct. 29.