CIT Plummets as Debt Deadline Looms
NEW YORK (
) --
CIT Group
(CIT) - Get Report
stockholders are facing a downright ugly situation.
Shares of the troubled commercial lender plunged 41% to $1.30 in early trades. Roughly 156 million had already changed hands a little more than 45 minutes into the session. The drop comes amid a report in the
Wall Street Journal
that the most likely scenarios to play out for the company ahead of Thursday's deadline to restructure its debt are either a bond swap that would lighten its $30 billion in outstanding liabilities by up to 40%; or else a filing for bankruptcy protection.
Either way, the euphoria that led the shares to close Tuesday's session up 34% at $2.20, the issue's first finish above $2 since early July, is looking to be terribly unfounded as investors in the company's equity would lose out in either case because bondholders would control the resulting entity.
Which course the company ends up on will largely be determined by what sort of accord, if any, that the steering committee of bondholders can reach amongst themselves, the
Journal
report said, with the main conflict coming between investors with debt coming due soon, and those whose holdings have a longer time horizon. If an agreement on the restructuring can't be reached, the bankruptcy filing is likely to follow.
Tuesday's rally was initially spurred by a
New York Post
report that hedge fund investor and CIT bondholder John Paulson had floated the idea of merging CIT with IndyMac, where he is also part of the ownership group, but the stock continued to run even after the prospect of the merger was shot down by multiple unnamed sources speaking to
Reuters
and
Dow Jones
.
Volume reached an extraordinary 360 million by the end of the Tuesday's session, the heaviest trading since the July 16-17 period when the company's fate last hung in the balance before the current bondholders provided the $3 billion bridge loan that's kept CIT afloat until now. In addition to Paulson, CIT's bondholders include Centerbridge Partners, Oaktree Capital, PIMCO and Silver Point Capital, among others.
Also of concern is the fate of the $2.3 billion in TARP funding that CIT, a lender to thousands of small- and mid-sized businesses, received in December 2008. The
Journal
article said much of that sum would likely be wiped out if the debt restructuring goes through.
