CIT Still Likely to Dodge Bankruptcy
NEW YORK (
) --
CIT Group's
(CIT) - Get Report
deferral of interest payments on
due in 2067 is not stirring new fears about a possible bankruptcy among credit analysts.
CIT's failure to make timely interest payments on the bonds, which are unusual in structure, does not trigger a default under the terms of the obligations.
"We don't view the suspension of payments as a surprise," wrote Kathleen Shanley, debt analyst at independent research firm Gimme Credit, in a note published Wednesday.
Standard & Poor's Ratings Service also confirmed that view on Wednesday, indicating that its rating was unaffected by the payment deferral.
The bond issue in question traded down slightly on the news to about 10 cents on the dollar, Shanley wrote. That was after the bonds had traded between 13 cents and 15 cents on the dollar through much of August.
Dwayne Moyers, CIO of SMH Capital Advisors, believes the 2067 bonds are an interesting investment on a risk-adjusted basis. He notes that while the potential downside is zero recovery, bondholders could see returns of as much as six or seven times their investment.
"To me it's like going to Vegas, where you have an 80% chance of winning five times your money, and you have a 20% chance of losing it all. That's a speculative position that many people will put on," Moyers says.
SMH, which owns about $100 million worth of CIT bonds, is unlikely to buy the bonds, as it does not buy noninterest-paying bonds. SMH also likes to take a more senior position in the line of creditors than these bonds represent, according to Moyers.
CIT has been in the headlines ever since it became clear in July that the company was effectively shut out of the capital markets and would not be able to convince regulators to guarantee its debt, as it had done for large banks like
Bank of America
(BAC) - Get Report
and
Wells Fargo
(WFC) - Get Report
, as well as for giant lender
General Electric
(GE) - Get Report
.
The resistance to guaranteeing CIT's debt, which apparently came from the FDIC, underscored a philosophical divide between Chairwoman Sheila Bair and her counterparts at the
Federal Reserve
and Treasury Department. The Fed and the Treasury stood behind CIT in December, approving its application to become a bank holding company, and taking a $2.3 billion preferred stake under the Troubled Asset Relief Program.
That stake is another reason it seems unlikely CIT will end up filing for bankruptcy: the government won't want to lose its investment. That is also a reason some CIT watchers believe the preferred shares may be a good investment. They assume the government will not be able to cut a better deal for itself than it does for other preferred shareholders. Preferred shareholders of
Citigroup
(C) - Get Report
were rewarded for making a similar bet. The bank converted about $58 billion of preferred stock into common shares, including roughly $25 billion of the government's $45 billion stake.
Yet another reason CIT is likely to avoid bankruptcy is the six money managers that extended $3 billion worth of credit to the company last month. That group, which includes bond giant
PIMCO
, is presumed to own a lot of CIT's debt, and its endgame appears to be to a strategy known as "loan to own." In other words, the bondholders buy up a controlling position in the debt and force the company to convert it to equity. That strategy is likely to be far more effective if CIT stays out of the bankruptcy courts, which is why the group accepted 87.5 cents on the dollar in a
debt exchange
last month.
--
Written by Dan Freed in New York
.
