July 23 (Bloomberg) -- Advisers tobondholders that rescued CIT Group Inc. with a $3 billion loan said creditors may push the company into Chapter 11 bankruptcy after a debt swap next month, according to people familiar with the matter.
If the company succeeds in swapping 90 percent of the $1 billion of floating-rate notes that come due Aug. 17, the lenders should require New York-based CIT to try to restructure out of court through debt exchanges with a pre-packaged bankruptcy option, Jeffrey Werbalowsky, chief executive officer of bondholder adviser Houlihan Lokey Howard & Zukin, said on a call with creditors yesterday, according to one of the people.
A pre-packaged bankruptcy is likely under the plan because it will be difficult to get almost all of CIT’s bondholders to agree to reduce their claims out of court, according to another person familiar with the advisers’ thinking.
Investors led by Newport Beach, California-based Pacific Investment Management Co. and Centerbridge Partners LP in New York, are preparing to take more control of CIT, which said in a regulatory filing this week that it may need to file for bankruptcy if it’s unable to exchange the notes. A pre-packaged reorganization could allow the 101-year-old commercial lender to reduce the $7 billion of unsecured debt that matures by June 30.
‘Plan A’
“Plan A is to get the tender offer successfully closed and promptly complete exchange offers out of court,” Werbalowsky said today in a telephone interview. If that fails, “of course we have plan Bs,” he said.
Should the tender offer, which expires Aug. 14, fail, Houlihan will recommend the bondholders allow CIT to file for bankruptcy before paying the August maturity, said the person, who declined to be identified because the call was private. This would be in the form of a pre-arranged bankruptcy, the person said. CIT is offering to buy the notes for 82.5 cents on the dollar.
“Whatever approach we take, my goal as an adviser is to minimize and eliminate any effect the capital structure modification we’re going to do will have on the customers, employees or the business of CIT,” Werbalowsky said.
Andrew Rosenberg, a partner at law firm and adviser Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, and CIT spokesman Curt Ritter didn’t return calls seeking comment.
CIT, led by Chairman and Chief Executive Officer Jeffrey Peek, said in the regulatory filing that the bondholder group agreed to swap all their August notes in the tender. The group owns less than half the securities outstanding, Werbalowsky said on the call.
Below Tender Price
The notes fell below the tender-offer price today, dropping 4.4 cents to 79.4 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. CIT’s $500 million of 4.125 percent notes maturing in November fell 1.5 cent to 60 cents on the dollar, Trace data show.
CIT shares fell 13 cents, or 14.9 percent, to 74 cents in New York Stock Exchange composite trading.
Besides Pimco and Centerbridge, the four bondholders that provided the financing are Los Angeles-based Oaktree Capital Management LLC, Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co. of Los Angeles, and Silver Point Capital LP in Greenwich, Connecticut. London-based Barclays Plc arranged the funding.
CIT has been unable to sell corporate bonds in more than a year and has been denied access to the Federal Deposit Insurance Corp.’s program to issue government-backed securities. It sought a rescue from bondholders after failing to win U.S. government assistance.
Two Parts
The bondholder group made $2 billion available immediately and promised another $1 billion by the end of the month. Each of the firms that participated owns at least $250 million of senior CIT bonds, according to Houlihan, the person said. To be eligible to participate in the remaining $1 billion of the financing bondholders must hold at least $250 million, the person said.
CIT said in the July 21 regulatory filing that its “existing liquidity” isn’t enough to make the August debt payment and that it needs permission from bondholders who made the loan to use the proceeds to repay the debt. The company, which has lost $3 billion in the last eight quarters, also said it expects to report a $1.5 billion loss for the second quarter.
Even if CIT fails, the bondholder group will probably make money on the loan because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. The book value of the collateral must be more than five times the amount of the loan and the so-called fair value must be more than triple the debt, CIT said in a filing.
‘A Friend in Need’
The loan has risen to 105 cents on the dollar since the financing was announced on July 20, according to traders who declined to be identified because the loan market is private. That means the bondholders have profited, at least on paper, on top of the 5 percent fee they charged CIT for the money.
“A friend in need is a friend indeed,” said Richard Coons, a high-yield bond broker at Carolina Capital Markets in Greenwich, Connecticut. “It was structured by the investors, and with those terms other people want in on it.”
Howard Marks, chairman of Los Angeles-based Oaktree, and spokesmen for Barclays and Silver Point declined to comment. Officials at Capital Research, Baupost, Centerbridge and Pimco didn’t return calls.
Interest on the rescue financing will be set at 10 percentage points more than the London interbank offered rate, which will have a floor of 3 percent. Three-month Libor was set at 0.502 percent yesterday.
Commitment Fee
The group received the 5 percent commitment fee on the 2.5- year loan, amounting to $100 million for the $2 billion already provided. They will get a 1 percent annual payment on the amount that’s not drawn upon, CIT said in the filing.
If CIT wants to retire the loan early, it must pay a 2 percent exit fee in addition to a prepayment premium of 6.5 percent on the amount it wants to reduce, the filing said. The 6.5 percent will decline to zero over 18 months.
“As their SEC disclosure indicates, CIT wasn’t exactly in a position to drive a hard bargain,” said David Havens, managing director at Hexagon Securities LLC in New York. “It’s a super secured high-coupon loan. It’s so over-collateralized through the security they’ve taken. CIT may have a lot of problems, but the investors buying this at Libor plus 10 percent are well covered.”
To contact the reporters on this story: Caroline Salas in New York atcsalas1@bloomberg.net; Pierre Paulden in New York atppaulden@bloomberg.net
