PrefBlog

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.
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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.

More nonsense from Congress about user-pay credit ratings:

“We are not going to correct this problem if in the future they can let us down again by the user paying the ratings agency for the value of their valuation,” Mr. Kanjorski said.
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While Mr. Kanjorsky did not go into specifics on how the ratings agencies might be compensated for their analysis in the future — currently, they get paid by the debt issuers, which many see as a huge conflict of interest — the lawmaker did mention that in the past, it was the user that paid for the rating.

CIT’s problems are two-fold: first, it has to deal with deteriorating credit quality of its assets – like every other lender, particularly in America – and second, it has been shut out of the bond market for well over a year. The second is usually related to the first, of course, but the descent to hell was so swift, so deep, so thorough and so extended that I think there’s other things going on. The bond market simply isn’t all that smart, y’know? I suggest technical factors like, f’rinstance, forced liquidation of CPDOs (they’ve been out of the news for a while, since 2008-9-4): CIT was a favoured ingredient of CDOs and I assume the same could be said for CPDOs – although that thought must be marked “speculative”. The potential for a near-term credit event could have widespread impact:

CIT Group Inc (CIT.N) tops the list of names in portfolios of European synthetic CDOs rated by Standard & Poor’s, which would mean widespread default losses in the nearly $600 billion market if it files for bankruptcy.

S&P said in late 2008 that 1,053 European synthetic collateralised debt obligations (CDOs) — 66 percent — included CIT, a New York-based lender to small and mid-sized businesses, in their portfolios of credit default swaps (CDS).
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Meanwhile, in the underlying CDS market, net notional exposure to CIT amounted to $3.465 billion in the week ended July 3, according to data from the Depository Trust and Clearing Corp (DTCC).

Given that CIT is a member of the CDX IG, which is the main U.S. investment-grade CDS index, “further developments are likely to be a focus for the market in the near term”, Deutsche Bank credit strategists wrote.

Out of the 1,000 top reference entities in the CDS market listed by the DTCC, CIT ranked 34th in net notional exposure.

Excluding sovereign CDS, it ranked 19th among corporate names after General Electric Capital Corp (GEA.N) and mostly banks including Deutsche Bank (DBKGn.DE), Morgan Stanley (MS.N) and Goldman Sachs (GS.N).

DBRS downgraded CIT today.

I’ve been reporting the CIT news as it comes in, but California is also dreamin’:

California had its credit rating, already the lowest of all U.S. states, cut for the second time in as many weeks over lawmakers’ failure to close a $26 billion deficit that left the most-populous U.S. state issuing IOUs to creditors.

Moody’s Investors Service said it lowered California’s credit rating two steps to Baa1 from A2 and said it could be reduced further if legislators don’t quickly address the state’s cash problem. The new grade is three levels above non-investment grade. Fitch Investors on July 6 lowered its evaluation of California’s general obligation bonds by two steps to BBB from A-, placing the debt two ranks above so-called high-yield, high- risk junk ratings.
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Even with the credit rating tumbling, investors say there is little risk of default. California Controller John Chiang resorted to issuing IOUs to insure that the state would have enough cash to make payments that have the highest priority under the state constitution, including those on its bonds, if there is a prolonged battle over the budget. Chiang said the IOUs mean the state should have funds to meet those obligations through September.

All the way through September, eh? Wow.

A rip-roaring day for the preferred share market, with PerpetualDiscounts regaining ground vs. the somewhat-less-strong-but-still-quite-strong FixedResets, on good volume throughout.