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

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

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 will ask bondholders to exchange unsecured obligations for either new secured debt maturing in four to eight years, preferred shares or a combination, the New York-based company said yesterday in a statement distributed by Business Wire. Investors holding bonds closest to maturity would get more new debt, while those with notes due later would receive proportionately more equity, said a person familiar with the matter, who declined to be identified as the talks are private.

Should the exchange fail, CIT said it would seek court protection through a pre-packaged bankruptcy. Yesterday, its bonds and credit-default swaps 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 the statement.

Court Authority

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 the statement.

CIT didn’t disclose how much it’s offering bondholders for their debt. The holders of notes maturing in 2009 will get as much as 90 cents on the dollar of new debt and 10 cents of equity, the Wall Street Journal reported, citing unnamed people. Notes maturing in 2010 are set to receive 85 cents of new debt and 15 cents of equity, the Journal reported.

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.

‘Acceptable’ Plan

“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.

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.

‘Market Concern’

“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.

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.

Bondholder Protection

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 $1.24 as of 9:34 a.m. in Frankfurt today.

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.”

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