CIT Shareholders Hold Breath
Updated to add closing prices, latest developments
.
NEW YORK (
) --
CIT Group
(CIT) - Get Report
shares surrendered close to half their value on Wednesday, enduring the heaviest volume session in the their 7-year trading history ahead of a key decision about the company's viability in its current form.
The stock finished at $1.21, down 45%. Volume of more than 562 million was by far the highest the issue has experienced since its debut on the New York Stock Exchange in July 2002.
The troubled commercial lender is up against a Thursday deadline to restructure its debt load of more than $30 billion, and
point to two resolutions of the situation -- either a debt exchange that would transfer the majority of the equity to existing bondholders or a filing for bankruptcy protection -- that would leave holders of the common stock largely out in the cold.
Shortly before Wednesday's closing bell,
Dow Jones
reported CIT already has a prepackaged bankruptcy plan in place as it continues to discuss its options with the bondholders. The article states the bondholders are now choosing between the debt-for-equity swap, filing for bankruptcy protection and taking their chances in court, and voting in favor of the prepackaged plan, which would require court approval as well.
In order for bondholders to give up on the 30%-40% figure of the current debt that's been mentioned, they would at the very least receive a huge chunk of preferred stock in exchange, diluting the worth of the common shares. In a research note issued Wednesday, analyst Sameer Gokhale of Keefe Bruyette & Woods estimated that, if 30% of CIT's debt were exchanged for equity, it would reduce the tangible book value of the common stock to between $1.25 to $1.50 per share from $7.48 at the end of second quarter. Gokhale maintains a 'market perform' rating and $1 price target on the stock
A more stark scenario would unfold if the company ends up in bankruptcy as CIT stockholders would be last in line for compensation, and their holdings could be effectively wiped out during the reorganization. Just ask anyone who held onto Kmart back in the day. Or, for a more recent example, there's General Motors.
So who stands to take the biggest hit? According to the latest data available through Yahoo Finance and filings with the Securities and Exchange Commission, roughly 80 percent of the company's outstanding stock was held by institutional investors, such as mutual fund managers and brokerage firms. The biggest holder was Brandes Investment Partners LP, a San Diego-based investment advisory firm with more than $50 billion in assets under management. As of June 30, the firm held a stake of roughly 7%, or 27 million shares, in CIT. Brandes wasn't immediately available for comment for this article.
One name that stood out among the top three holders was RiverSource Investments LLC, which happens to be a unit of
Ameriprise Financial
(AMP) - Get Report
.
Ameriprise made news of its own Wednesday after the Minneapolis-based financial services provider agreed to acquire the long-term asset management business of
Bank of America
(BAC) - Get Report
for a cash consideration of up to $1.2 billion. RiverSource held a 5.1% stake in CIT as of July 31, an investment representing more than 20 million shares. While still significant, the position actually represented a heavy and recent paring down of its bet on CIT. On June 30, RiverSource had held more than 44 million shares translating to a stake of 11.4%. A representative of RiverSource declined comment.
Ameriprise wasn't the only name investor to curtail its holdings this summer. FMR LLC, an affiliate of Fidelity Investments, disclosed in an SEC filing on August 10 that its stake was down to 14.4 million shares, or 3.7%. That percentage compares to a stake of nearly 10% at the end of June.
How much CIT stock these entities still hold is up for debate, as they very likely could have been selling into the recent volatility in the shares. Even factoring in Wednesday's sell-off, the shares have really just given back the gains they logged on Tuesday. The closing price of $1.21 is still within the range the issue's been in since early June, when severe doubts about the company's balance sheet began to weigh on market sentiment and the credit ratings agencies consigned the company's debt to junk status.
Those brave enough to hold CIT stock through the closing bell will be anxiously awaiting word on the decision of the bondholders. Even if the company is able to restructure and preserve some value for common shareholders, it's still facing an uphill battle when it comes to raising the capital it needs to return to being a viable lender. After all, it's still saddled with the junk label and the government, which supplied CIT with $2.3 billion in TARP funds in December 2003, hasn't softened its stance since denying the company further help in the summer. The previously cited
Dow Jones
article said CIT was also seeking new financing to the tune of $3 billion to $4 billion, and that it could also eventually consider selling certain assets.
Written by Michael Baron in New York
