PrefBlog

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.
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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.”
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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.
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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.
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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!

CIT has confirmed its $3-billion line from bondholders and announced a very curious tender offer:

CIT Group Inc. (NYSE: CIT), a leading provider of financing to small businesses and middle market companies, today announced that it entered into a $3 billion loan facility provided by a group of the Company’s major bondholders. CIT further announced that it intends to commence a comprehensive restructuring of its liabilities to provide additional liquidity and further strengthen its capital position.

Today’s actions, including a $3 billion secured term loan with a 2.5 year maturity (the “Term Loan Financing”), are intended to provide CIT with liquidity necessary to ensure that its important base of small and middle market customers continues to have access to credit. Term loan proceeds of $2 billion are committed and available today, with an additional $1 billion expected to be committed and available within 10 days.
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As the first step in a broader recapitalization plan, CIT has commenced a cash tender offer for its outstanding Floating Rate Senior Notes due August 17, 2009 (the “August 17 Notes”) for $825 for each $1,000 principal amount of notes tendered on or before July 31, 2009. Lenders in the Term Loan Financing have agreed to tender all of their August 17 notes.
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The Company and the Term Loan Financing steering committee will work together on the balance of the recapitalization plan, which is expected to include a comprehensive series of exchange offers designed to further enhance CIT’s liquidity and capital.
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Pursuant to the Offer, CIT is offering to purchase any and all of its August 17 Notes for $800 for each $1,000 principal amount of outstanding August 17 Notes tendered and not validly withdrawn prior to 12:00 midnight, New York City time, at the end of August 14, 2009 (unless extended by CIT). Holders who validly tender their August 17 Notes prior to 5:00 p.m., New York City time, on July 31, 2009 (unless extended by CIT, the “early delivery time”), and who do not validly withdraw their tenders, will be paid an additional $25 cash for each $1,000 principal amount of outstanding August 17 Notes tendered by the early delivery time.
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The Offer is conditioned upon, among other things, holders of August 17 Notes tendering and not withdrawing an amount of August 17 Notes equal to at least 90% of the aggregate principal amount of August 17 Notes outstanding (the “Minimum Condition”). The Minimum Condition may be waived by CIT and the Term Loan Financing steering committee. If the Minimum Condition is satisfied or waived, CIT intends to use the proceeds of the Term Loan Financing to complete the Offer and make payment for the August 17 Notes. There can be no assurances that the restructuring plan or the Offer can be completed successfully.

A price of $82.50 is a lot more than the notes were trading for last week:

CIT’s floating-rate notes maturing Aug. 17 jumped about 17.1 cents to 87.6 cents on the dollar as of 4:32 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit-default swaps that allow investors to hedge against a CIT default for five years dropped 5.5 percentage points to 39 percent upfront, according to broker Phoenix Partners Group.

… but I must say, I still don’t get it. They are expecting major losses:

CIT Group Inc., the 101-year old commercial lender seeking to avoid collapse, said it expects to report a loss of more than $1.5 billion for the second quarter and may need to file for bankruptcy if it’s unable to tender for notes maturing next month.

CIT’s “existing liquidity” isn’t enough to repay the $1 billion of floating-rate notes maturing on Aug. 17, the New York-based lender said today in a regulatory filing. CIT, which announced a $3 billion rescue financing from its bondholders yesterday, has asked holders of the August notes to swap their claims for 82.5 cents on the dollar.

California claims to have balanced the budget:

California lawmakers reached an agreement with Governor Arnold Schwarzenegger over how to close a $26 billion budget deficit that pushed the most-populous U.S. state to the brink of insolvency.

The deal, reached by legislative leaders after two months of frequently acrimonious negotiations, would slash spending for schools, public works and welfare programs amid the longest recession since the 1930s. If approved by the full Senate and Assembly, the agreement will also siphon money from municipalities, force companies and individuals to pay income taxes sooner and make it more difficult to receive state aid.

The WSJ points out:

Under the plan, state lawmakers would cut $15 billion in spending. The rest of the gap would be filled by taking funds from local governments and through one-time fixes and accounting maneuvers. The deal must still be approved by rank-and-file legislators, who are expected to vote on it Thursday.

No surprises in today’s BoC statement:

Some of the early strength in domestic demand represents a bringing forward of household expenditures, which modestly alters the profile of growth over the projection period relative to the April MPR. The Bank projects that the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011.

Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.
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Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

Boris Johnson, the mayor of London, has warned that Hedge Funds are mobile:

The Mayor and shadow chancellor told Business Secretary Lord Mandelson that the tighter regulation proposed for hedge funds would drive London investors to cities such as New York, Singapore, Hong Kong and Geneva.
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They said the new supervision regime for hedge funds, private equity and venture capital would be stricter than the rest of the world and weaken Europe’s competitive position. London would be worst hit because it was home to 80 per cent of European hedge funds.

They argued tough regulation was needed to prevent another financial crisis, but it had to be set at a global level to ensure a level playing field.

They did not, however, let us in on any hints about why tough regulation of hedge funds is needed to prevent another financial crisis. It’s just political posturing, unfortunately. I’m disappointed, however, that they did not mention Dubai as a possible destination.

S&P has raised eyebrows regarding volatile CMBS ratings:

Standard & Poor’s raised the ratings on commercial mortgage-backed debt from three bonds sold in 2007, restoring the top-ranked status of the securities.

The debt had been cut as recently as last week, rendering the securities ineligible for the Federal Reserve’s Term Asset- Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement.

One of the affected issues is a Credit Suisse deal:

Standard & Poor’s Ratings Services today raised its ratings on the class A-2 and A-3 commercial mortgage pass-through certificates from Credit Suisse Commercial Mortgage Trust 2007-C3 to ‘AAA’ from ‘BBB+’ (see list).

The raised ratings follow the implementation of our recently updated criteria for the application of ‘AAA’ losses on U.S. conduit and fusion commercial mortgage-backed securities (CMBS).

… which seems somewhat terse. The supporting publication U.S. CMBS ‘AAA’ Scenario Loss And Recovery Application doesn’t help a lot; it’s simply a review of the methodological changes, including:

Refining the methodology we use to assess the impact of losses and recoveries resulting from our ‘AAA’ rating scenario for super-senior classes in U.S. conduit/fusion CMBS.

Further differentiating the timing of the losses resulting from our ‘AAA’ term and maturity default tests when cash flow modeling transactions. See section VII-D of “U.S. CMBS Rating Methodology And Assumptions for Conduit/Fusion Pools” for our term and maturity default tests.

Spreading out losses that are applied to a transaction’s certificates over a longer period of time.

… but the “Impact on Outstanding Rating” sections notes:

We will use these criteria for rating all U.S. conduit/fusion CMBS transactions with super-senior classes. There are currently 336 deals with 1,436 certificates in this category. Our testing of the methodology suggests that applying losses and defaults under our ‘AAA’ scenario will account more fully for the benefits of time tranching. The application of these criteria will likely result in upgrades to seven super-senior tranches from three transactions that we recently downgraded.

“Time Tranching” refers to sequential pay structures. According to Nomura’s ABS primer:

“Time tranching” refers to dividing cash flows from securitized assets among different classes of securities so that some receive repayment of principal before others. In the simplest cases, a deal might offer several classes of serially maturing securities. Some investors might prefer the securities with shorter maturities while others might favor the ones with longer maturities. Collateralized mortgage obligations (CMOs) are the most ubiquitous examples of time tranching.

The trouble with structured securities is that small changes in assumptions can cause huge changes in ratings – especially considering that a percentage point or two takes you out of investment grade completely, never mind the AAA category. This is exacerbated by the philosophy of ratings: a default with a recovery of 99.9999% is the same thing as a total loss. Nevertheless, this story is going to earn S&P some mockery – particularly due to the implications with TALF.

Earnings calls are usually pretty boring affairs, with sell-side bozos lobbing softball questions at their lunch buddies, but the Western Union call today was different:

— Western Union Co. apologized to Piper Jaffray Cos.’ Robert Napoli after a man posing as the analyst infiltrated the money-transfer firm’s conference call and cursed at Chief Executive Officer Christina Gold.

Today’s call discussing Western Union’s second-quarter earnings had been under way for almost 52 minutes when a man identified as Napoli came on the line and delivered an expletive-laden tirade spanning about 40 seconds.
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[Western Union spokesman Tom] Fitzgerald said the call stems from a “long-running harassment case” involving the man that dates back to when Western Union was owned by Greenwood Village, Colorado-based First Data Corp. “It’s been going on for quite a while.”
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A pause of about 40 seconds followed the tirade before SunTrust Robinson Humphrey Inc. analyst Andrew Jeffrey asked about Western Union’s long-term earnings potential. No one answered. “So much for that,” he said about 20 seconds later and hung up.

Gary Kohn, a vice president for investor relations, came on the line two minutes later to apologize “for that rude interruption” and turned over the call to Gold for a minute- long closing comment.

Dealbreaker has the transcript:

Operator: Your next question comes from the line of Robert Napoli from Piper Jaffray. Please proceed.

(Q – Robert Napoli): Hi, Christina, you are going to jail — you really — you [indiscernible] now, and you are going to pay for the corruption. You buy judges [ph] — you buy everybody. You deserve [indiscernible] just to pull information on people, and I am going to name you and shame you, you bitch, and all of the people surrounding you, especially David Schlapbach, and you know all [indiscernible] with you. So get ready; you both in-charge [indiscernible]. You [indiscernible] a profit user, you bought the case [ph], but I am going to fuck you legally…

I like the parts about (a) the guy not being cut off after the first ten seconds, and (b) the Western Union guys running away and hiding for about three minutes.

A rip-roaring day for preferreds, with PerpetualDiscounts gaining nearly 80bp amidst good price volatility and relatively heavy volume.

CIT has reportedly received a $3-billion financing offer from extant bondholders:

CIT Group Inc. reached a deal with bondholders for $3 billion in financing to avoid bankruptcy and restructure out of court, the Wall Street Journal reported.
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Thomas Lauria, a lawyer at White & Case LLP, said in an e- mail last week that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy. He said the group was waiting for a response from CIT and didn’t name its members.

CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents on July 17, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

There are reports with more details, none of which are yet confirmed:

— CIT Group Inc., the 101-year-old commercial finance company seeking to ward off bankruptcy, agreed to a $3 billion loan for 2.5 years from a group of its bondholders, according to people familiar with the situation.

CIT bondholders have committed $2 billion of the loan as of today, and plan to raise the remaining $1 billion from existing bondholders within the next 10 days, said one of the people, who declined to be identified because the negotiations are private. The board agreed to the financing yesterday, and CIT plans to announce the agreement as soon as today, another person said.

Econbrowser‘s James Hamilton contributed to a piece in the NYT:

So there is a process of fumbling around on a case-by-case basis as we try to figure out where to draw the line — prop up A.I.G., let Lehman and CIT go. Uncertainty about just who is going to be protected and who will be allowed to fail is yet another factor exacerbating the current instabilities.

Since there’s no easy way out once we face that decision, the obvious answer is to use regulation to prevent any private institution from putting us in a position where policymakers feel their only option is a public bailout. “Too big to fail” is, in my opinion, “too big.”

And Accrued Interest urges letting it go:

So put this all together, and you have a basic business model: asset-based lender without access to bank funding, that just flat out doesn’t fit in today’s world. CIT may as well be making type writer ribbons. I’m sorry, it just has to go.

This is the moment were we take the training wheels off the economy. We had to do it at some point. We had to eventually send a message to the world of finance that not everything was going to be bailed out.

How great would it be for CIT to work something out with bond holders? I mean, an actual “normal” deal to avoid bankruptcy? I mean, it would almost be like capitalism is back!

The somewhat geeky topic of separation of Central Banking and Bank Supervision has become a political issue in the UK:

Conservative leader David Cameron proposed the most sweeping changes to Britain’s financial regulatory system in a decade, adopting U.S.-style plans to strengthen the central bank and create a consumer watchdog.

The opposition party will scrap the Financial Services Authority and hand powers over lenders deemed too big to fail to the Bank of England if it wins the next election due by June 2010. The plan mirrors proposals by U.S. President Barack Obama to beef up the Federal Reserve.

Standard political reaction. Find out who is least blameworthy in today’s crisis, put them on a pedestal, then act surprised when the next crisis (after the next election, they hope!) shows that nobody has perfect foresight.

Accrued Interest has some interesting things to say about bond indentures for US Municipals.

PerpetualDiscounts shot up today on good volume with a great deal of price volatility.

I have often noted on this blog that one problem with big banks is that there are too many layers of servile management between the people who really know what’s going on and the decision makers. Guess what happens when middle management is not servile?:

Paul Moore compares his dismissal as head of risk at failed U.K. bank HBOS Plc to King Henry VIII’s decapitation of his sainted Chancellor Thomas More 474 years ago.

Moore lost his job in 2004 after he warned that the bank’s growth strategy posed “a serious risk to financial stability.” More lost his head in 1535 after he refused to recognize Henry VIII’s self-appointment as head of the Church of England.

“There is a natural conflict of interest where people whose job it is to challenge have to report to those who have the power of life and death over them,” Moore, 50, said in an interview in London. “What caused this financial crisis was the inadequate balance and separation of powers.”

Risk and compliance managers should report to a non- executive director for “quality assurance,” rather than to the executives they monitor, Moore said. His idea was rejected yesterday in a preliminary government review of banks by former Bank of England director David Walker. Risk managers should report to both executives and non-executives, Walker said.

It’s something of tricky question. Dotted line reporting means no responsibility; dual reporting is just a shade on the nutbar side. On the other hand, if I was on the director’s risk committee and I didn’t have all the access I wanted to the Chief Risk Officer (or didn’t have confidence in him), I’d be a little upset. It should also be noted that risk management is a cost centre, not a profit centre. I’ve seen some of the ads for risk management personnel … invariably, anybody with enough brains, balls and knowledge to do the job properly can make way more money doing something else.

OSFI has promoted another ex-banker to help regulate the banks.

Today’s CIT news is:

CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, have begun discussing options for funding the lender if it succumbs to bankruptcy, according to people with knowledge of the matter.

JPMorgan and Morgan Stanley are in talks with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, said the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.
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“This thing doesn’t have a future,” CreditSights analyst David Hendler said today in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,” the New York-based analyst said referring to the rescue financing.

I have other things to do this weekend, so the market update will be late … really late … Sunday evening?

Update, 2009-7-19: Another good strong day for preferreds on good volume, with FixedReset median YTW all the way down to 4.20%!

The amount of US Commercial Paper outstanding is shrinking dramatically. Bloomberg reports:

For now, companies are willing to pay higher rates to ensure access to capital after watching credit dry up almost overnight as the subprime mortgage contagion spread in 2007 and 2008 and Lehman Brothers Holdings Inc. collapsed in September.

More than 60 companies sold bonds this year to repay commercial paper, including Con Edison, Verizon Communications Inc. in New York and Kellogg, the 103-year-old maker of Keebler cookies and Rice Krispies cereal, according to data compiled by Bloomberg. Non-financial companies have sold $306 billion of investment-grade bonds this year, a record pace.

“Treasurers aren’t sleeping at night because they don’t know if they can roll over commercial paper,” said Anthony J. Carfang, a partner at Treasury Strategies Inc, a Chicago consulting firm. “They’d rather lock in money for five years and pay a little more.”

Maybe it’s not so much a bad thing. With all the new emphasis on liquidity management and the example of CIT impossible to ignore, maybe these treasurers are wondering ‘What if we’re completely locked out of the capital markets for a year?’

Speaking of CIT …. bondholders are reportedly discussing a debt-for-equity swap:

Pacific Investment Management Co., CIT’s largest bondholder based on regulatory filings, was to host a call, and debt owners are considering hiring financial and legal advisers, said the person, who declined to be identified because the discussions are private. The company hasn’t proposed an exchange offer.
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“CIT indicated that it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file,” CreditSights analysts Adam Steer, David Hendler and Pri De Silva wrote in a report. “We believe the figure is in the range of $4 to $6 billion plus, making outside capital sources shy away.”

This would presumably wipe-out the participants in December’s $2.4-billion swap. The company, rather predictably, has issued a press release stating:

that its Board of Directors and management, in consultation with their advisors, are continuing to evaluate alternatives to improve the Company’s liquidity. CIT is in discussions with potential lenders to secure financing.

The Company is continuing to serve customers. CIT appreciates the strong support it has received from many of its 1 million small business and middle market customers, industry associations and dedicated employees.

Another day of strong performance for preferred shares, on continued good volume. I don’t know what happened to the MFC PerpetualDiscounts – their decline was unmatched by the MFC FixedResets and common. Just another one of those pref thingies, I guess…

Apparently there has been a “credit line run” on CIT:

Regulators tried to craft a rescue package late yesterday as CIT customers, prompted by reports of possible bankruptcy, drained $750 million from credit lines on Monday and Tuesday, the Wall Street Journal reported, citing people familiar with the matter.

The U.S. may let CIT transfer assets to its bank in Utah, and the Federal Reserve would let CIT pledge some assets at its discount window while the company tries to refinance debt, the newspaper said.

This type of run was discussed in the post A Question of Liquidity: The Great Banking Run of 2008

At the company’s request, the NYSE halted trading, “pending news”. Reuters had no news, but plenty of speculation:

U.S. officials are considering giving CIT Group Inc (CIT.N) a temporary loan as part of an aid package to help the lender avoid collapse, a source familiar with regulators’ thinking said on Tuesday.

The temporary loan is one option being considered to give CIT room to strengthen its balance sheet by raising additional capital through debt or equity, said the source who requested anonymity because the plans could change.

Other options include access to the U.S. Federal Reserve’s discount window and asset transfers, the source said. The source said there was no guarantee a plan would be reached.

But just after 6pm, CIT aanounced everything had fizzled:

CIT Group Inc. (NYSE: CIT), a leading provider of financing to small businesses and middle market companies, today announced that it has been advised that there is no appreciable likelihood of additional government support being provided over the near term.

The Company’s Board of Directors and management, in consultation with its advisors, are evaluating alternatives.

And in California they’re singing Whoops! I did it again:

Moody’s Investors Service yesterday lowered California’s credit rating two steps to Baa1 from A2 and said its evaluation may be reduced further unless legislators quickly solve the cash crisis.

The BofA/Merrill investigation continues:

Former Treasury Secretary Henry Paulson said letting Bank of America Corp. scuttle its takeover of Merrill Lynch & Co. last year was “unthinkable,” and his remarks about ousting management were “appropriate.”

Paulson “intended to deliver a strong message” to Chief Executive Officer Kenneth Lewis in December “that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” the former official said in remarks prepared for a congressional hearing tomorrow. The text was obtained today by Bloomberg News.
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Paulson told Lewis on Dec. 21 that backing out of the deal “would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system,” according to the testimony. Paulson confirmed he had told Lewis the Fed might remove management and the board of the Charlotte, North Carolina-based bank if they failed to complete the takeover of New York-based Merrill Lynch.

Seems to me that Paulson is preparing to talk out of both sides of his mouth. If backing out would have showed misjudgement, why is Treasury presenting an insurance bill for $4-billion?

Bank of America Corp., the largest U.S. bank by assets, benefited from implied federal backing on about $118 billion of Merrill Lynch & Co. assets and owes the government compensation, the chairman of a House of Representatives committee studying the purchase of Merrill said.

“If you or anyone at Bank of America made a commitment, verbal or otherwise, to enter into this deal with the United States government, I urge you to honor that commitment,” Edolphus Towns, a New York Democrat, said in a letter yesterday to Chief Executive Officer Kenneth Lewis that was obtained by Bloomberg News. “It is the right thing to do.”

Regulators say Bank of America owes at least part of a $4 billion fee it agreed to pay in January because the company benefited from U.S. backing on Merrill assets such as mortgage- backed bonds, Bloomberg News reported on July 13, citing people familiar with the matter.
…
The U.S. provided the bank $20 billion in capital plus the asset guarantees to keep Lewis from abandoning the takeover of Merrill Lynch.

The discussion in the US regarding the regulatory approach to the size of banks is getting more heated, but there’s nothing really new:

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending. The idea goes beyond the Obama administration’s regulation-overhaul plan, which would have the Fed adjust capital and liquidity standards for the biggest firms, without any pre-set fees.

“What we have suggested is financial disincentives for size and complexity,” Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a “legitimate” option.

PerpetualDiscounts closed today with a median bid-YTW of 6.27%, equivalent to 8.78 interest at the standard equivalency factor of 1.4x. Long Corporates remain at around 6.4% – well, maybe just a smidgen higher – and so the pre-tax interest-equivalent spread has narrowed in a little over the week, to about 235bp; still in excess of levels seen throughout most of the Credit Crunch.