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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.

 

 

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Tue, 09/01/2009 - 09:44 | 54923 RobotTrader
RobotTrader's picture

Junker Stock Watch:














Tue, 09/01/2009 - 10:14 | 54944 Anonymous
Anonymous's picture

Why don't you post 15 charts in a separate entry so I don't have to scroll through them? Only the CIT chart is relevant to this post.

Tue, 09/01/2009 - 11:55 | 55036 Anonymous
Anonymous's picture

Why don't you suck it up. I like them.

Tue, 09/01/2009 - 12:24 | 55094 DaddyWarbucks
DaddyWarbucks's picture

Oooh! My heart is pounding , my palms are sweating, and I'm panting. Those charts are pure financial porn. Keep 'em coming.

Tue, 09/01/2009 - 14:34 | 55251 hbjork1
hbjork1's picture

Anonymous, 54944

Don't forget FRE and FNM.

Tue, 09/01/2009 - 09:45 | 54924 They steal from...
They steal from us everyday's picture

No reason to panic folks, the good news is that Goldman Sachs swooped in last month and contractually locked up all of the assets of CIT from under the noses of those pesky shareholders. So it is all good!

Tue, 09/01/2009 - 09:45 | 54926 RobotTrader
RobotTrader's picture

Parabolic Screamer Watch:

Tue, 09/01/2009 - 09:50 | 54930 RobotTrader
RobotTrader's picture

Everyone got their rubbers?

Tue, 09/01/2009 - 09:58 | 54936 Fish Gone Bad
Fish Gone Bad's picture

I still have to go to Le Mans.

Tue, 09/01/2009 - 09:54 | 54931 Project Mayhem
Project Mayhem's picture

this situation is hiilarious

 

btw thx for the hotties once i get forexbot installed i will be rolling in the cash. i heard this attract hot women.

Tue, 09/01/2009 - 09:55 | 54932 Anonymous
Anonymous's picture

Futures indicated stocks would be down. Instead, dip buyers moved in and ran SPY up almost 0.5% in front of the ISM at 10:00. Makes no sense unless you have a good idea ISM will not disappoint.

Tue, 09/01/2009 - 10:03 | 54938 lizzy36
lizzy36's picture

clearly number leaked @ around 9:45am

Tue, 09/01/2009 - 09:55 | 54933 Anonymous
Anonymous's picture

CIT has nothing to worry about. How can you kill something that isn't alive?

Tue, 09/01/2009 - 09:58 | 54935 Hephasteus
Hephasteus's picture

Hal9000: Come on baby needs a new pair of Fusion I/O drives.

Makes sad smiley emoticon to the other computers.

Tue, 09/01/2009 - 10:13 | 54943 Project Mayhem
Project Mayhem's picture

haha

Tue, 09/01/2009 - 10:03 | 54937 Anonymous
Anonymous's picture

CIT needs to do a 1-20 reverse split like AIG. Then the stock can be manipulated higher. Then the secondary can be priced.

Tue, 09/01/2009 - 10:10 | 54941 Anonymous
Anonymous's picture

No Comment : http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&d...

"Deferring interest payments can help CIT Group continue to reduce its near-term debt burden, furthering its efforts to remain in business after nearly collapsing earlier in the year."

You see it's positive news! - So CIT will rally straight to 100$, they invented institution who can borrow but is no obligated to return debt, Fantastic! This is free market I like, you are free from everything!

Tue, 09/01/2009 - 10:17 | 54945 buzzsaw99
buzzsaw99's picture

They should outsource something to Chindia.

Tue, 09/01/2009 - 10:27 | 54950 Hephasteus
Hephasteus's picture

They should outsource thier lobby to house "lobbyists" in India. Then they outsource thier accounting in "WhereHouses".

Tue, 09/01/2009 - 10:24 | 54947 Anonymous
Anonymous's picture

The markets today remind me of ED-209 in the first Robocop when it falls down the staircase and twitches wildly when it can't get up.

All your machine are belong to broken?

Tue, 09/01/2009 - 10:26 | 54948 RobotTrader
RobotTrader's picture

Better keep an eye on these Psycho Chicks....

Their mood swings tend to lead the overall market.

 

Tue, 09/01/2009 - 10:33 | 54953 Anonymous
Anonymous's picture

Were there charts in there?

Tue, 09/01/2009 - 11:05 | 54979 max2205
max2205's picture

Thanks for the chart porn!!.... lol

Tue, 09/01/2009 - 23:31 | 55814 MinnesotaNice
MinnesotaNice's picture

I cannot believe that you threw Kathy Lee Gifford in there again... what is your deal with her?

Tue, 09/01/2009 - 10:31 | 54952 Gunther
Gunther's picture

In the case of CIT trading volume and liquidity seem to be two very different animals.

The volume is some million shares a day but CIT can not issue stock to make the required payments. In other words, the market is illiquid.

That means that High Frequency Trading does NOT add liquidity, only volume.

So, what is the justification for HFT besides the profit for the traders?

Tue, 09/01/2009 - 10:37 | 54955 RobotTrader
RobotTrader's picture

A couple of low-grade hookers getting squeezed...

 



Trading Charts

Tue, 09/01/2009 - 10:45 | 54963 economicmorphine
economicmorphine's picture

If there lobby is so great, why don't they just sell it to the US taxpayer for $500 billion?  Heck, the taxpayer will buy anything.  Obama could even trot Geithner out to explain how we're gonna make a profit on that lobby.  At least 85% of the public, including 100% of NYT reporters, would believe it.

Tue, 09/01/2009 - 15:05 | 55293 SteveNYC
SteveNYC's picture

Hahahaha!! I walk past it daily, not sure what my IRR would be on a $500Bn purchase of purchase of the CIT lobby, but heck, I'm sure it will be negative. Would this be a green shoot?

Tue, 09/01/2009 - 10:48 | 54964 Anonymous
Anonymous's picture

I just bought a ton of calls on CIT and AIG...why? because it seemed like the dumbest thing to do.

Tue, 09/01/2009 - 11:03 | 54976 Anonymous
Anonymous's picture

Thx Robot for the ......err..uh...blowup of your avatar.

It's clear now that she is most definitely sporting a push-up. A more perfect metaphor for this market is unlikely to be found.

Tue, 09/01/2009 - 11:54 | 55035 JET55118
JET55118's picture

I love this. The CIT drama is so fun to watch, keep up the coverage.

Tue, 09/01/2009 - 12:10 | 55041 TopHat (not verified)
TopHat's picture

educate people on how the 401k system has been used to scam everybody since 1982!!

good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Tue, 09/01/2009 - 11:59 | 55044 Anonymous
Anonymous's picture

Hey, these charts aren't so bad!

Tue, 09/01/2009 - 12:20 | 55086 Anonymous
Anonymous's picture

1. The guy posting the nude pics should be kicked off. It totally drags down the performance of the rest of the site.

2. Does this constitute a default for CIT, if so what is going on in the credit?

Tue, 09/01/2009 - 19:45 | 55635 Anonymous
Anonymous's picture

there are no nude chics on this page.

i think you should be kicked off for not knowing the difference.

Tue, 09/01/2009 - 19:54 | 55645 Anonymous
Anonymous's picture

Why do the pics of chicks show them with clothes on? Who looks at pictures of girls on the internet with clothes on!?!?

Do NOT follow this link or you will be banned from the site!