CIT Bankruptcy V2.0 Next; Upcoming Debt-For-Equity Conversion Renders Equity Worthlesser Even As Cramer Pumps Stock
How many times can one of the world's worst-managed and toxic-laden companies be on the verge of bankruptcy? As long as Obama is president, one could answer "in perpetuity" although CIT may finally be on its last breath. The WSJ is out with this stunner:
The fate of CIT Group
Inc. was hanging in the balance Tuesday as the large commercial lender
readied a plan that would likely hand control of the company to its
CIT is preparing a sweeping exchange offer that would eliminate 30%
to 40% of its more than $30 billion in outstanding debt, said a person
familiar with the matter.
For the uninitiated, a debt-for-equity means the old equity is worth zip. Nada. That won't, however, stop it from trading up to $1,000 before the HFT algos decide they need to move and suck the liquidity rebates out of some other bankrupt deranged monster of a company.
The plan would offer bondholders new debt secured by CIT assets, as
well as nearly all of the equity in a restructured company. The new
debt would mature later than current debt, the impending maturity of
which has posed a problem for CIT.
If not enough bondholders agreed to the plan, the company could seek
to execute the restructuring in bankruptcy court, the person said. The
result could potentially be one of the largest Chapter 11
bankruptcy-court filings in U.S. history.
So there you have it: keeping the zombified living dead walking for a few extra months only leads to the same final outcome. Yet the costs to the taxpayers keep climbing.
One issue is the $2.3 billion taxpayer investment made in CIT through
TARP. While the U.S. would recover a small amount in any such exchange
plan, it is likely that much of the sum would be wiped out, said people
familiar with the matter.
Presumably this will shut up all those idiots who have claimed what a success for taxpayers the Fed/Treasury's bailout of everything with a balance sheet has been.
So poor Obama is now in the same place he was in July, when a Hail Mary rescue financing from Pimco, Oaktree and Silverpoint gave the company a few extra months.
Whether to provide further aid to CIT presented a difficult question for the Obama administration.
Failure to do so opened it to the criticism that it was aiding giant
banks but not a smaller lender, and one upon which many smaller
businesses depend for financing. CIT wanted to get in on a program in
which the Federal Deposit Insurance Corp. guaranteed lenders' debt.
Even in case the company manages to finalize its exchange out of court, the resulting company will be much, much smaller. The resulting impact on the millions of small business operators will be dramatic, as during its death throes CIT was still servicing existing contracts. In bankruptcy those will be the first to go.
However, as the WSJ points out, one thing is for certain:
Under either the scenario of a bond exchange or a bankruptcy, the shares in CIT would lose all or most of their value.
So if you are PM who rode CIT from $0.32 to today's closing price: congrats, you made your year. If, however, you were not lucky enough to sell before close today, you just may not be able to afford the down payment on that Hamptons timeshare after all, sorry.
In the meantime, Jim Cramer out with this today:
Citi and CIT Are Primed for Upside, by Jim Cramer, 9/29/2009, 1:54 PM EDT
Citigroup's on the move, so is CIT . I think that Citigroup will be the
biggest beneficiary of the new plan to buy toxic assets, because it is
basically running its SIV as discontinued operations and it could
benefit from the new program. CIT is about the possible IndyMac link-up
courtesy of John Paulson, a real smart guy who was negative about
mortgages before it paid to be negative. Dan Freed on CIT CIT Surges on
of IndyMac Deal
I put both of these up there as examples of companies that won't die,
and because they won't die, they live. I know that seems a little
circular in reasoning, but because Citigroup never suffered a run like
Wachovia and Washington Mutual did, it made it and as our flagship site
mentioned, it is safe. If it is safe, it can go higher.
Because no one forced CIT into bankruptcy, it can live to play again, and when I read in the New York Post that Paulson owns CIT debt, I realized that he's powerful enough to save this company, particularly because he is one of the investors in IndyMac and knows his way around the bottom of the debt barrel.
These two stocks represent lottery tickets that are no longer rip-ups because they have made it out of the "critical care" stage and are recovering.
I would buy them both.
No commentary necessary.
h/t Joe Saluzzi