CIT Pledges to Cut $5.7 Billion of Debt in Swap Offer (Update2)

By Pierre Paulden and Shannon D. Harrington Oct. 2 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender, is seeking to cut at least $5.7 billion of debt to help it avoid collapse and return to profitability after nine quarters of losses. CIT asked bondholders to exchange unsecured obligations for new secured debt maturing in four to eight years and preferred shares, according to a statement from the New York-based company. Investors holding bonds closest to maturity will get more new debt, while those with notes due later will receive proportionately more equity, according to a filing to the Securities and Exchange Commission today. Should the exchange fail, CIT will seek court protection through a pre-packaged bankruptcy, it said yesterday in a statement distributed by Business Wire. Its bonds and credit- default swaps yesterday showed investors were growing increasingly concerned that the company, led by Chief Executive Officer Jeffrey Peek, will be unable to restructure out of court as $1.15 billion of debt comes due by year-end. “To do what they want to do out of court, they need very high consent levels to eliminate the problem of holdouts,” Kevin Starke, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said this week before details of the plan were released. CIT is also asking creditors to approve a pre-packaged bankruptcy if it misses the exchange target, according to yesterday’s statement. The company can use the “authority of the courts” offered in bankruptcy proceedings, Starke said. The bondholder steering committee, which provided $3 billion of emergency cash in July, told the company it will exchange $10 billion of unsecured debt or vote for the prepackaged bankruptcy plan, according to yesterday’s statement. CIT bondholders will receive between $700 and $900 of new debt plus between 0.41 and 3.26 of new preferred shares for every $1,000 of existing debt tendered, the company said in the SEC filing today. Holders of the company’s most-junior securities will receive either 2.04 or 4.07 new preferred shares for every $1,000 of notes swapped, and no new debt. Bondholders will own 94 percent of the company assuming 100 percent of existing notes are exchanged, according to the filing. The new preferred stock will have a liquidation preference of $1,300 per share and holders will be entitled to 87.5 votes per share on matters put to stockholders for vote, CIT said. Offer Expiry The exchange offers, which have specific reduction targets for debt maturing by 2012, will expire on Oct. 29, CIT said. The company could emerge from a pre-packaged bankruptcy within 30 days to 60 days of that date should the offers fail, a person familiar with the matter, who declined to be identified, said Sept. 30. “This plan maximizes franchise value and can be executed quickly and effectively through a series of voluntary debt exchange offers or an expedited in-court restructuring process,” Peek said in the statement. “Upon completion of either alternative, CIT will be a well-funded bank-holding company with a strong capital position and market-leading franchises.” CIT had to come up with a restructuring plan “acceptable” to the majority of the bondholder steering committee by Oct. 1, the company said in an Aug. 17 filing. About $9.14 billion of CIT loans and bonds mature through 2010, according to data compiled by Bloomberg. The company has $43 billion of loans and bonds, Bloomberg data show. Credit Swaps CIT’s $1 billion of floating-rate notes due in March fell 2.5 cents yesterday to 70.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The annualized amount credit-default swaps traders demanded to protect against a default for three months climbed more than five-year protection, according to CMA DataVision, signaling that traders were bracing for bankruptcy. “The bond prices reflect the market concern that a pre- packaged bankruptcy is becoming more likely,” Adam Steer, an analyst at fixed-income research firm CreditSights Inc. in New York, said in a telephone interview yesterday. Credit-default swaps protecting against a CIT default through Dec. 20 have jumped 5 percentage points in the past two days to 27 percent upfront, according to CMA DataVision, while contracts for five years have climbed 2.5 percentage points to 36.5 percent. Default Risk Climbs The prices mean that on an annual basis it costs more to protect CIT debt for three months than for five years, a so- called inverted curve that signals the perceived risk of a near- term default has climbed. Few of the contracts appear to be trading, said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. CIT fell 15 cents, or 12 percent, yesterday to $1.06 in New York Stock Exchange composite trading, the lowest price since Aug. 4. The shares, which traded at more than $61 each in February 2007, have lost 77 percent this year. The company recovered in European trading, climbing to $1.20 as of 12:55 p.m. in Frankfurt today. Dunkin’, Eddie Bauer CIT funds about 1 million businesses from Dunkin’ Brands Inc. in Canton, Massachusetts, to Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. The company says it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. The lender needs to cut debt after posting more than $5 billion in losses during the past nine quarters and losing access to the unsecured debt markets it relied on for funding. CIT is “targeting a capital structure with significantly less leverage and establishing capital ratios well in excess of our regulatory standards and in line with the most financially sound of our peers,” the lender said yesterday in a regulatory filing, “positioning the company for a return to profitability and investment-grade ratings.” To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net