CIT apparently turned down GE financing:
CIT Group Inc., the commercial lender seeking to avoid bankruptcy, rejected a General Electric Co. offer of at least $2 billion in senior secured loans backed by aircraft, four people familiar with the matter said.
CIT spurned the loans from GE’s finance arm, a rival in some lending businesses, over the weekend in favor of $3 billion in loans from a group of bondholders, two of the people said. GE’s offer, while less costly and requiring fewer assets as collateral, wouldn’t have provided cash until July 31 because of a delay in structuring the deal, said two of the people, who didn’t want to be identified because the offer wasn’t public.
…
The GE loan could have been expanded to include additional funds using other collateral if CIT required it, three of the people said. GE’s offer wouldn’t have presented cash until the end of July because the company would need time to check out CIT’s collateral.
A ten day delay was so important that CIT paid up for money and put up more collateral? It sounds like CIT management was in denial and waited until absolutely the last minute before biting the bullet. Perhaps their thoughts are more focussed now that the bondholders’ committee has some influence.
In the meantime, at least one investor is rather peeved:
Pacific Investment Management Co., Centerbridge Partners LP and the four other bondholders that put up $2 billion in financing for CIT Group Inc. made an instant $100 million on an investment analysts say is almost risk free.
CIT, the 101-year old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to the creditors and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.
“The terms are egregious,” said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. “They ripped the faces off everyone with these terms.”
…
Even if CIT fails, the bondholder group will probably make money because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. The lenders have “virtually 100 percent assurance” they’d be able to recoup all their money in a bankruptcy, said Sameer Gokhale, an analyst with Keefe Bruyette & Woods Inc. in New York.“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”
Outside of the “urban underworld,” Egan, 52, said he couldn’t recall ever seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn-shop operator blush.”
Bankruptcy loans arranged this year have an average interest rate of 7.25 percentage points more than Libor, compared with 5.3 percentage points in 2008, Bank of America Merrill Lynch analysts led by Jeffrey Rosenberg wrote in a report last month. So-called debtor-in-possession loans never exceeded 4 percent over Libor before that, they said.
DBRS gave its opinion regarding the tender offer today:
Indicating that default is imminent, the $1.0 billion Floating Rate Senior Notes (the Notes) due August 17, 2009 were today downgraded to C from CCC. This action reflects the announced cash tender offer for the Notes. Under the terms of the offer, bondholders will receive $800 for each $1,000 of principal amount of the Notes tendered. Bondholders tendering their Notes on or before July 31, 2009, will receive $825 per $1,000 of principal of the Notes tendered. Importantly, CIT indicated that failure to receive tenders of at least 90% of the aggregate principal of the Notes outstanding would result in the offer not being completed, which may lead to the Company seeking protection under the U.S. Bankruptcy Code. DBRS views the tender offer as coercive and therefore a default under DBRS policy. DBRS will lower the rating to D upon completion of the exchange. Under DBRS policy, certain securities are typically placed in a default status, if an exchange results in a final outcome that leads to terms that are disadvantageous to bondholders or effectively a forced consent exchange because failure to do so would likely lead to an issuer’s inability to pay.
In addition, CIT’s announcement indicated that a comprehensive series of exchange offers will be forthcoming as part of the Company’s recapitalization plan. As such, DBRS has lowered the Long-Term Debt ratings on all remaining CIT long-term debt to CC, given DBRS’s anticipation that further exchange offers are likely to be coercive and disadvantageous to bondholders.
Fitch said much the same thing:
Fitch Ratings-New York-22 July 2009: CIT Group Inc. announced that it has commenced a cash tender offer to purchase the company’s senior notes due Aug. 17, 2009 (August Notes) for 80% of par, according to Fitch Ratings. Upon completion of the offer, Fitch expects to downgrade CIT’s long-term Issuer Default Rating (IDR) to ‘RD’ from ‘C’, as Fitch would consider the purchase a Coercive Debt Exchange (CDE). On July 16, 2009, Fitch downgraded CIT’s IDR to ‘C’ which indicated that a default (‘D’) or restricted default (‘RD’) appears imminent or inevitable. The tender offer has been driven by the announcement that CIT has entered into a $3 billion loan facility (Credit Facility) provided by the company’s major bondholders. The Credit Facility will be secured by substantially all of CIT’s unencumbered assets and includes fairly stringent collateral coverage covenants. Such terms are extremely onerous and may limit the company’s future financial flexibility.
While CIT’s announcements may forestall an event of default due to a bankruptcy filing, consummation of the debt tender offer is consistent with Fitch’s criteria of a CDE. Specifically, bondholders will receive a reduction in principal and, absent the tender offer, there would exist a high probability that CIT would file for bankruptcy. It is also possible that, as part of the company’s broader recapitalization plan, bondholders will receive equity or other hybrid instruments in exchange for debt which would also constitute a CDE.
…
Fitch also acknowledges CIT Bank’s consent to an Order to Cease and Desist (C&D) issued by the FDIC. The order prevents extension of credit to CIT and affiliates without written consent from the FDIC and the Utah Department of Financial Institutions (UDFI). CIT Bank is also prohibited from declaring or paying dividends and increasing brokered deposits above $5.5 billion. The ring-fencing of the bank’s assets significantly reduces any chance of CIT furthering its bank strategy. In the event CIT files for bankruptcy, Fitch believes it is highly likely that regulators would seize control of CIT Bank. Under that scenario Fitch would downgrade the bank’s IDR and Individual Ratings to ‘D’ and ‘F’, respectively.
The question of whether Central Banking should be held distinct from bank supervision is a knotty one that has been debated often; good arguments can be made both ways. I prefer separation of powers, because otherwise a single institution has too much power and can become unfocussed; the trend in the States is for increasing the mandate of the Fed, beyond the current combination of authority. Bernanke is in favour of mandate-creep:
Federal Reserve Chairman Ben S. Bernanke said consumer protection should be added to the Federal Reserve Act as a formal policy goal along with low inflation and full employment.
“We were not quick enough, we were not aggressive enough to address consumer issues earlier in this decade,” Bernanke, 55, said in response to a question from Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee.
“My recommendation to you to consider, Mr. Chairman, would be to ask whether there are steps that could be taken to strengthen the commitment of the Federal Reserve,” Bernanke said on the second day of his semiannual testimony to Congress. “One would be to put consumer protection in the Federal Reserve Act along with full employment and price stability as a major goal of the Fed.”
Not surprising, really, given all the turf battles between US agencies in the past year, but disappointing never-the-less. Stick to fighting defalation, Ben! You’re good at that!
The SEC is micro-managing the investment sales business:
The U.S. Securities and Exchange Commission may ban investment advisers from giving money to so- called placement agents and campaigns of politicians overseeing retirement funds as it cracks down on abuses at public pension funds overseeing $2.2 trillion of assets.
…
Investment advisers pay placement agents for access to pension-fund money. The SEC proposal would bar money managers and some of their “executives and employees” from making such payments, according to the statement.In March, the SEC and Cuomo accused former New York Deputy Comptroller David Loglisci of arranging for the state pension fund to invest $5 billion with money managers who had paid kickbacks to former Democratic adviser Hank Morris. Morris ran a placement agency.
The ban on campaign donations makes some degree of sense, although it might not survive a freedom of speech challenge – but mind you, I haven’t seen any legal opinions on that one at all. The ban on placement agents, however, makes no sense at all.
It’s a trite expression at this time, but axioms become trite because they’re true: sunlight makes the best disinfectant. Publicize the presentations of investment managers, make public track records in a common format a requirement for anybody with discretionary authority … and a lot of the problems will disappear. Ensuring that allocation decisions of pension funds are not made by a single person would help a lot too.
As it stands, the prohibition on placement agents will serve only the interests of salesmen; each firm will be required to have sales agents and infrastructure in house, instead of outsourcing it so they can get on with investment management.
It was another day of strong advances for prefs, particularly the PerpetualDiscount issues of insurers. Volume was up sharply.
This is a much nicer market than last July’s! PerpetualDiscounts now yield 6.17%, equivalent to 8.64% interest at the standard equivalency factor of 1.4x. Long corporates have returned +0.67% month-to-date and now yield … oh, call it 6.35%, implying a pre-tax interest-equivalent spread of about 230bp; slightly tighter than last week’s spread of 235bp, but still well above the Credit Crunch Normal of about 200bp and, of course, much wider than the good old days of 100-150bp. Not quite as pleasant as November’s apocalyptic +400-odd, though!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4172 % | 1,164.1 |
| FixedFloater | 7.34 % | 5.52 % | 37,911 | 16.61 | 1 | -1.3324 % | 2,091.4 |
| Floater | 3.27 % | 3.90 % | 78,362 | 17.64 | 3 | 0.4172 % | 1,454.4 |
| OpRet | 4.98 % | -2.01 % | 143,572 | 0.09 | 15 | 0.0052 % | 2,215.9 |
| SplitShare | 6.06 % | 4.06 % | 89,923 | 4.13 | 4 | -0.0108 % | 1,935.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0052 % | 2,026.2 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5673 % | 1,811.2 |
| Perpetual-Discount | 6.12 % | 6.17 % | 156,561 | 13.66 | 71 | 0.5673 % | 1,668.1 |
| FixedReset | 5.51 % | 4.16 % | 596,030 | 4.21 | 40 | 0.1287 % | 2,086.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.M | Perpetual-Discount | -1.53 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 16.10 Evaluated at bid price : 16.10 Bid-YTW : 7.48 % |
| BAM.PR.G | FixedFloater | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 25.00 Evaluated at bid price : 14.81 Bid-YTW : 5.52 % |
| GWO.PR.F | Perpetual-Discount | -1.24 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 23.53 Evaluated at bid price : 23.80 Bid-YTW : 6.26 % |
| ELF.PR.G | Perpetual-Discount | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 16.86 Evaluated at bid price : 16.86 Bid-YTW : 7.11 % |
| BAM.PR.I | OpRet | -1.04 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2013-12-30 Maturity Price : 25.00 Evaluated at bid price : 24.70 Bid-YTW : 5.93 % |
| BAM.PR.P | FixedReset | 1.01 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 26.92 Bid-YTW : 5.55 % |
| MFC.PR.B | Perpetual-Discount | 1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.44 Evaluated at bid price : 18.44 Bid-YTW : 6.40 % |
| BNS.PR.N | Perpetual-Discount | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.01 Evaluated at bid price : 22.11 Bid-YTW : 5.97 % |
| CM.PR.E | Perpetual-Discount | 1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.69 Evaluated at bid price : 22.90 Bid-YTW : 6.14 % |
| CM.PR.D | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 23.23 Evaluated at bid price : 23.50 Bid-YTW : 6.14 % |
| BMO.PR.L | Perpetual-Discount | 1.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 23.95 Evaluated at bid price : 24.15 Bid-YTW : 6.11 % |
| CM.PR.P | Perpetual-Discount | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 21.91 Evaluated at bid price : 22.25 Bid-YTW : 6.20 % |
| RY.PR.H | Perpetual-Discount | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 24.63 Evaluated at bid price : 24.85 Bid-YTW : 5.78 % |
| ELF.PR.F | Perpetual-Discount | 1.23 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.99 Evaluated at bid price : 18.99 Bid-YTW : 7.05 % |
| BMO.PR.H | Perpetual-Discount | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.39 Evaluated at bid price : 23.03 Bid-YTW : 5.82 % |
| TRI.PR.B | Floater | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 15.80 Evaluated at bid price : 15.80 Bid-YTW : 2.50 % |
| TD.PR.R | Perpetual-Discount | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 23.91 Evaluated at bid price : 24.11 Bid-YTW : 5.83 % |
| SLF.PR.D | Perpetual-Discount | 1.36 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 17.95 Evaluated at bid price : 17.95 Bid-YTW : 6.27 % |
| BAM.PR.O | OpRet | 1.36 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 23.85 Bid-YTW : 6.47 % |
| CU.PR.B | Perpetual-Discount | 1.39 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-07-01 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 5.61 % |
| PWF.PR.L | Perpetual-Discount | 1.41 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 20.85 Evaluated at bid price : 20.85 Bid-YTW : 6.15 % |
| TD.PR.P | Perpetual-Discount | 1.77 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.84 Evaluated at bid price : 22.99 Bid-YTW : 5.73 % |
| SLF.PR.C | Perpetual-Discount | 1.97 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.11 Evaluated at bid price : 18.11 Bid-YTW : 6.22 % |
| PWF.PR.K | Perpetual-Discount | 2.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 6.22 % |
| SLF.PR.A | Perpetual-Discount | 2.13 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.71 Evaluated at bid price : 18.71 Bid-YTW : 6.43 % |
| POW.PR.B | Perpetual-Discount | 2.22 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 20.76 Evaluated at bid price : 20.76 Bid-YTW : 6.50 % |
| CIU.PR.A | Perpetual-Discount | 2.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 19.59 Evaluated at bid price : 19.59 Bid-YTW : 5.97 % |
| PWF.PR.H | Perpetual-Discount | 3.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.75 Evaluated at bid price : 23.00 Bid-YTW : 6.27 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| SLF.PR.A | Perpetual-Discount | 83,248 | RBC crossed 25,000 at 18.70; Nesbitt bought 10,000 from TD at 18.74. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.71 Evaluated at bid price : 18.71 Bid-YTW : 6.43 % |
| RY.PR.B | Perpetual-Discount | 82,407 | RBC crossed 50,000 at 19.89. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 19.91 Evaluated at bid price : 19.91 Bid-YTW : 6.02 % |
| RY.PR.I | FixedReset | 68,300 | RBC crossed two blocks, of 19,900 and 21,700 shares, both at 26.11. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 4.16 % |
| BMO.PR.P | FixedReset | 63,520 | Anonymous crossed (?) 10,000 at 26.75, then another 15,000 at 26.78. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 4.15 % |
| GWO.PR.H | Perpetual-Discount | 63,034 | National sold two blocks to Nesbitt, 20,900 at 18.80 and 11,000 at 18.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 18.93 Evaluated at bid price : 18.93 Bid-YTW : 6.49 % |
| BNS.PR.N | Perpetual-Discount | 60,723 | Nesbitt crossed 50,000 at 21.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-07-22 Maturity Price : 22.01 Evaluated at bid price : 22.11 Bid-YTW : 5.97 % |
| There were 61 other index-included issues trading in excess of 10,000 shares. | |||
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