CIT Forced To Sell Stock To Satisfy Interest Payment, Unable To Do So, Lack Of Interest Confirms Stock Overvaluation

Tyler Durden's picture

Things are so good at CIT with the company making so much cash these days, that it has decided to really conserve every dollar it makes, even if it means not making bond payments. In an 8-K filed earlier, the proto-bankrupt, zombie second-lien lender and owner of the swankiest lobby on 42nd Street notified holders of its $500 million in 2067 Notes (2067?? good luck collecting that principal) that subsequent to a trigger event occurring, the company was forced to use an Alternative Payment Mechanism to pay the September 15 interest payment. And despite various computers betting that CIT's stock is worth much more than zero, club CIT will, unfortunately, not be making this payment as it is unable to "execute the APM."

And as for those wondering just what the elusive trigger event is that will make many bondholders unhappy, here is the definition from the original indenture:

  • the Tangible Equity Amount is less than 5.5% of Total Managed Assets for the Company's most recently completed fiscal quarter; or
  • the Average Four Quarters Fixed Charge Ratio for the Company's most recently completed fiscal quarter is less than or equal to 1.10. provided

Here is the definition of the Alternative Payment Mechanism is: the company has to sell common stock to satisfy its interest payment. Yet, even with CIT trading at roughly infinity % higher than where it should be, CIT was still unable to do a follow on offering, as required by the indenture! My, my - could sophisticated investors be balking at the opportunity to gobble up CIT stock at even a whopping 10% discount to the otherwise 9999% premium to fair zero value?

Obligation to Effect Certain Sales of Common Stock or Qualifying Preferred Stock; Alternative Payment Mechanism. (a) If, as of a Trigger Determination Date, a Trigger Event has occurred and for so long as it is continuing (regardless of whether a notice of an Optional Deferral has been delivered), the Company shall make Commercially Reasonable Efforts to effect sales of (i) the Company’s Common Stock (which may include treasury shares and shares of Common Stock sold pursuant to any dividend reinvestment plan or employee benefit plan of the Company) in an aggregate amount not exceeding the Share Cap Amount or (ii) Qualifying Preferred Stock, such that the Company will have raised an aggregate amount of net proceeds from such sales, together with any other sales of such securities over the 180-day period prior to the next Interest Payment Date, that is sufficient to satisfy accrued and unpaid interest (including any Compounded Interest) on the Notes (excluding any Optionally Deferred Interest (including Compounded Interest thereon), which may remain unpaid or be paid out of any source of funds) on such Interest Payment Date, and the Company shall satisfy such accrued and unpaid interest (including any Compounded Interest) on the Notes on such Interest Payment Date to the extent, and only to the extent, of the amount of such aggregate net proceeds (the “Alternative Payment Mechanism”); provided that (i) in no event shall the sale of Qualified Preferred Stock in connection with Alternative Payment Mechanism in the aggregate exceed 25% of the original aggregate principal amount of the Notes and (ii) the Company may, in its discretion, increase the Share Cap Amount (including through the increase of its authorized share capital, if necessary) if the Company determines that such increase is necessary to allow it to issue sufficient shares of its Common Stock to satisfy its obligations to pay Mandatorily Deferred Interest on the Notes pursuant to the Alternative Payment Mechanism; provided, further, that the Company’s obligation to make Commercially Reasonable Efforts to sell its Common Stock or Qualifying Preferred Stock to satisfy its obligation to pay interest (x) is subject to the occurrence of a Market Disruption Event, (y) does not apply to any Optionally Deferred Interest (including Compounded Interest thereon) and (z) does not apply at the Final Maturity or if an Event of Default with respect to the Notes has occurred and is continuing. To the extent that the amount of such proceeds is insufficient to satisfy all such accrued and unpaid interest (including Compounded Interest on Mandatorily Deferred Interest) on such Interest Payment Date, the Company shall be required to mandatorily defer any accrued and unpaid interest (other than Optionally Deferred Interest (including Compounded Interest thereon)). If a Market Disruption Event prevents the Company from making interest payments in accordance with the Alternative Payment Mechanism, the Company shall be required to defer payments of interest until the earliest of (i) the termination of the Market Disruption Event, (ii) the date ten consecutive years after the first date on which the Company, either due to an Optional Deferral or a Mandatory Deferral, deferred interest, and (iii) the Final Maturity.

Neither of these two look particularly enjoyable to the hoardes of computerized speculators who have been buying up the stock like it is going out of style. Below is the 8-K filing that one hopes can bring some sanity back to the 2600 cores that (only) trade CIT day in and day out.

On August 31, 2009, CIT Group Inc. (the "Company") provided a Notice of Continuance of Trigger Period (the “Notice”) to the holders of the Company’s junior subordinated notes due March 15, 2067 (the “Notes”) issued pursuant to the Indenture dated as of January 20, 2006, as amended and supplemented by the First Supplemental Indenture, dated as of January 31, 2007 (as so amended and supplemented, the "Indenture"), between the Company and The Bank of New York (as successor to JPMorgan Chase Bank, N.A.), as trustee (the "Trustee"), with respect to the continuance of a Trigger Period (as such term is defined in the Indenture).

 

As set forth in the Notice, a Trigger Event (as such term is defined in the Indenture) occurred requiring the Company to use commercially reasonable efforts to execute the Alternative Payment Mechanism (as such term is defined in the Indenture, “APM”) to satisfy the September 15, 2009 interest payment. The Company is not able to execute the APM and therefore the Company is required to mandatorily defer interest on the Notes. Accordingly, the Company provided Notice of deferral for the September 15, 2009 interest payment to the holders of the Notes. Subject to the terms of the Indenture, deferred interest will continue to accrue and compound, as applicable, until payment is made.

 

The Notice is attached hereto as Exhibit 99.1 and is incorporated herein by reference. The foregoing description of the Notice is qualified in its entirety by reference to such Exhibit.

 

The Notice does not impact interest payments on any other CIT debt obligation.