PrefBlog

CIT amended terms on its exchange offer:

• Extension of the expiration date of the offers and the solicitation of acceptances of the Plan of Reorganization only with respect to offers made by CIT Group Funding Company of Delaware LLC (“Delaware Funding”) from October 29, 2009 to November 5, 2009. The Early Tender Date for these notes is October 29, 2009,
• Increased the interest rate payable on the Series B Notes from 9.0% per annum to 10.25% per annum.

… which sounds to me like the deal’s in trouble. They’ve also responded to Carl Icahn’s overtures (reported on PrefBlog on October 23) in a surprisingly mild-mannered way … but to no avail. Icahn’s stepping up the pressure:

Carl Icahn, who says he’s the largest bondholder of CIT Group Inc. with $2 billion of debt, stepped up his attacks on the lender’s restructuring plan as a deadline approaches tomorrow to avert collapse.

Icahn gave CIT an hour to respond late yesterday afternoon to his offer to provide $4.5 billion in financing, and threatened to sue the New York-based company if it chose a competing package from other bondholders. CIT said its plan to either exchange $30 billion of debt for new bonds and equity or file a pre-packaged bankruptcy is worth more to creditors.
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Icahn, 73, who built his reputation in the 1980s as a corporate raider, said yesterday the investments are worth more in a traditional bankruptcy than in a so-called pre-packaged workout. He is proposing to buy “smaller” holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they reject CIT’s plans, “assuring them a floor price in the event the notes trade lower,” he said yesterday in a statement.

Egan-Jones says the pre-pack should be voted down:

CIT Group Inc. bondholders should reject a proposed $30 billion debt swap and pre-packaged bankruptcy plan designed to avert the 101-year-old commercial lender’s collapse, according to Egan-Jones Ratings Co.

CIT’s unsecured debt is worth about 90 cents on the dollar and senior creditors can expect close to full recovery, Egan- Jones President Sean Egan and analysts Kent Hughes and Gale Gillespie wrote in a report dated today.

And today, the secured facility was increased:

it has expanded its current $3 billion senior secured credit facility by an additional $4.5 billion. The new $4.5 billion tranche, which is being provided by a diverse group of lenders, including many of the Company’s bondholders, will be secured by substantially the same assets as the existing $3 billion tranche and any additional collateral that becomes available as a result of the Company’s refinancing of certain existing secured credit facilities.
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The new $4.5 billion tranche matures in January 2012, and includes an option for the Company to extend all or a portion of the new tranche for an additional year. It is expected to close today and will be used to refinance a portion of the Company’s existing secured indebtedness, which may come due as a result of the restructuring, and for general corporate purposes.

The Company also addressed a commitment letter received yesterday from Carl Icahn to provide CIT a new $4.5 billion term loan. Although Mr. Icahn and his advisors had been in discussions with the Company for several days and were fully aware of CIT’s deadline, they provided the Company less than one hour to review and accept his commitment letter. Additionally, despite several requests from the Company for information and multiple deadline extensions, the Company has yet to receive a signed credit agreement and evidence of Mr. Icahn’s ability to fund the commitment.

As a result of the lack of evidence that Mr. Icahn has arranged sufficient funding at this time, CIT’s Board of Directors determined that the best interests of the Company and its stakeholders would be served by proceeding with the credit facility provided by a diverse group of lenders.

Norway has increased its policy rate:

Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

The Oslo-based bank raised the overnight deposit rate to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate.
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The bank expects underlying inflation, which adjusts for energy and taxes, to average 2.75 percent this year and 1.75 percent in 2010. The mainland economy will shrink 1.25 percent this year and grow 2.75 percent in 2010, it estimates.

The key rate will average 1.75 percent this year and 2.25 percent in 2010, rising to an average 4.25 percent by 2012, the bank said.

The AIG bail-out is providing providing fodder for conspiracy theorists:

The Federal Reserve Bank of New York said Tuesday that it had no choice but to instruct American International Group last November to reimburse the full amount of what it owed to big banks on derivatives contracts, a move that ended months of effort by the insurance giant to negotiate lower payments.

Fed officials offered the explanation in a rare response to a media report after Bloomberg News said that the New York Fed, led at the time by then-President Timothy F. Geithner, directed AIG to make the payments after it received a massive government bailout. The officials said AIG lost its leverage in demanding a better deal once the company had been saved from bankruptcy.

Lawmakers and financial analysts critical of the payouts say it amounted to a back-door bailout for big banks.
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The precise cost to taxpayers of these decisions is difficult to determine. Bloomberg, quoting an industry source, reported Tuesday that AIG was aiming to pay just 40 percent of the $32.5 billion it owed to the banks. Using those figures, the report concluded that the government needlessly overpaid $13 billion.
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New York Fed officials explained that the main reason creditors were willing for a time to accept less than full reimbursement was their fear of an AIG bankruptcy. The government’s rescue of the company removed that threat and left the company with virtually no way to wrestle concessions from the banks.

Just because conspiracy theorists are nuts doesn’t mean they’re always wrong!

The SEC released today Testimony Concerning Dark Pools, Flash Orders, High Frequency Trading, and Other Market Structure Issues. Interesting, although ultimately unsatisfying: I remain perplexed regarding the badness of flash orders and high-frequency trading:

while flash orders may potentially be providing benefits to certain traders, it may no longer serve the interests of long-term investors or the markets as a whole. The Commission has stated, both in adopting Regulation NMS and in proposing to ban flash orders, that the interests of long-term investors should be upheld as against those of professional short-term traders, when those interests are in conflict. The comment period on the proposal to ban flash orders remains open until November 23, and the staff and the Commission look forward to carefully analyzing the comments received.

It was another putrid period of poorly performing preferreds today, with PerpetualDiscounts down 20bp and FixedResets losing 11bp. Volume was off a bit (prefhound was putting his orders through Pure today), but still healthy.

PerpetualDiscounts now yield 6.05%, equivalent to 8.47% interest at the standard equivalency factor of 1.4x. Long Corporates now yield a hair under 6.0%, so let’s call the Pre-Tax Interest-Equivalent Spread (also called the Seniority Spread, according to me) 250bp, with all levels indistinguishable from those reported on October 21.

It has been obvious for a while that a story like this would be coming … but it’s funny anyway:

Mr. Greenberg has been quietly building up a family of insurance companies that could compete with A.I.G. To fill the ranks of his venture, C.V. Starr & Company, he has been hiring some people he once employed.

Now, Mr. Greenberg may have received some unintended assistance from the United States Treasury. Just last week, the Treasury severely limited pay at A.I.G. and other companies that were bailed out by taxpayers. That may hasten the exodus of A.I.G.’s talent, sending more refugees into Mr. Greenberg’s arms, since C. V. Starr is free to pay whatever it wants.

“Basically, he’s just starting ‘A.I.G. Two’ and raiding people out of ‘A.I.G. One,’ ” said Douglas A. Love, an insurance executive who has also hired A.I.G. talent for his company, Investors Guaranty Fund of Pembroke, Bermuda.
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Treasury officials said their special master for pay, Kenneth R. Feinberg, was aware that if he set pay standards that were too stringent, he could further harm A.I.G. by driving away its executives. “We’re acutely aware of this possibility,” said Andrew Williams, a department spokesman. “That’s why Ken Feinberg spent hours at A.I.G. trying to understand that specific dynamic and strike the right balance.”

Hours. What dedication! What thoroughness!

Mark Carney has come up with a good illustration of the intellectual bankruptcy of many of the current regulatory efforts:

Financial institutions need to demonstrate an awareness of their broader responsibilities. Financiers should ask themselves every day how their activities affect systemic risk? and what are they doing to promote economic growth?

Oh, yeah? Who’s going to pay them to do this? Who’s going to give them a look at the books of their counterparties? Who’s going to give them power over their counterparties? This is just another cheap attempt to shield regulators from responisibility for the consequences of their actions.

And there may be consequences: Roubini thinks another bubble is forming:

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

On the other hand, the new paradigm means that employer cartels can cloak themselves in holiness:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he won’t actively recruit the best employees from competitors operating under pay restrictions imposed after federal bailouts.

“I morally have an issue with people going against those companies that are hamstrung,” Dimon said today at the Securities Industry and Financial Markets Association meeting in New York. “It’s wrong to say, ‘Let’s go hire the best people.’ We’re not going to do that.”

It’s wrong to compete! It’s wrong to put the boots into your competitor when he’s down!

John Mackie has written an interesting piece about bond indentures, Bonds’ Bold Terms: Bonds Rule, With Banks Out

Despite all my efforts, there are still a few misguided souls out there who believe that Credit Rating Agencies should predict future economic conditions; some of these even believe that if they don’t do it better than the Fed, it must be because they are either corrupt or incompetent and probably both. DBRS has today released its overview of Canadian credit markets, with slides from presentations on structured finance and the outlook for 2010 and beyond. The forecasts have the usual quota of entertainment value; there are a few interesting charts:

Click for big

Back to normal for preferreds, with PerpetualDiscounts losing 14bp on the day and FixedResets down fractionally. Volume was normal – OK, maybe off a bit – but the volume highlights were dominated by straights.

OSFI has released a statement on federally regulated pension plan solvency:

The latest results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at June 30, 2009 was 0.88, meaning the total value of assets of all federal plans was 12 per cent lower than liabilities, calculated on a solvency basis. This compares to an estimated solvency ratio of 0.85 in December 2008.
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The private pension plans subject to OSFI regulation currently represent seven per cent of all private pension plans in Canada, accounting for approximately 12 per cent of private pension assets.

Prior Fed policies are under continued attack:

A month after warning that property prices are rising “probably excessively,” Norges Bank Governor Svein Gjedrem is set to increase interest rates on Oct. 28. Reserve Bank of Australia Governor Glenn Stevens cited costlier real estate as a reason for raising rates three weeks ago.

At the Federal Reserve, officials under Chairman Ben S. Bernanke are reviewing whether recent gains in asset prices and narrowing credit spreads are justified as they try to ensure near-zero borrowing costs don’t generate future market turmoil.

The approach may herald what New York-based Morgan Stanley calls a “new era” in which central banks pay more attention to asset prices when setting monetary policy and devising regulation, broadening their focus from inflation.
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Former Fed Chairman Alan Greenspan advocated a hands-off approach to asset prices during the U.S. expansion that lasted six years until December 2007. He said it was easier to clean up the mess of a bust than to spot bubbles and that monetary policy was too blunt to deflate them.

“There is no evidence that it works other than in computer models,” he said in a January 2008 interview about the idea that central banks should raise rates to pop asset bubbles. He noted that the stock market merely leveled off when the Fed doubled rates to 6 percent in 1994-95 and then resumed its climb.

All I can suggest is: as long as there are policies and policy makers, there will be policy errors. The new paradigm will not eliminate errors; it will merely change their nature.

Springfield Massachussets saved a few bucks on outrageous portfolio management fees:

Salvatore Calvanese, the treasurer of Springfield, Massachusetts, for four years, had a ready defense for why he risked $14 million of taxpayer money on collateralized-debt obligations laden with subprime mortgages in 2007.

He didn’t know what he was buying, he says, and trusted the financial professionals who sold them and told him they were safe.

With a jealous eye on the $369-million held under CBO, BMO has introduced a short term bond ETF:

The BMO Short Corporate Bond Index ETF seeks to replicate, to the extent possible, the performance of a short term corporate bond index, net of expenses. Currently, the BMO Short Corporate Bond Index ETF seeks to replicate the performance of the DEX Short Term Corporate Bond Index. The Manager may, in its discretion and without unitholder approval, change the DEX Short Term Corporate Bond Index to another widely recognized short term corporate bond index in order to provide investors with exposure to a short term corporate bond index. If the Manager changes the DEX Short Term Corporate Bond Index, or any index replacing such Index, the Manager will issue a press release identifying the new index. The BMO Short Corporate Bond Index ETF invests in a variety of debt securities primarily with a term to maturity between one and five years. Securities held in the Index are generally corporate bonds issued domestically in Canada in Canadian dollars, with an investment grade rating. As an alternative to or in conjunction with investing in and holding the Constituent Securities, BMO Short Corporate Bond Index ETF may invest in or use exchange traded funds, mutual funds or institutional pooled funds and derivative instruments to obtain exposure to the performance of the DEX Short Term Corporate Bond Index.

The MER is 30bp – and they’re looking to track the index net of fees. There are a number of ways in which this could be attempted:

• Taking views on the markets
• Trading the hell out of it
• heavily overweighting teeny-tiny issues and/or bad credits and/or non-bonds

I suspect they’ll try to juice the yields by holding non-bonds, such as sub-debt (well … OK. These are in fact bonds, they’re just not short-term bonds) and Tier 1 issues (not bonds by any stretch of the imagination) – but we will see.

Nine times out of ten – no, that’s too gloomy, call it ninety-nine times out of one-hundred – the increased risk won’t make any difference. That last time however? Just wait for the whining. ‘How was I supposed to know the terms? I’m only the portfolio manager! And … gloryosky! They’re in the index!’

The Canadian preferred share market managed to eke out small gains today, with PerpetualDiscounts up 3bp and FixedResets gaining 10bp. Volume was solid, dominated as usual by FixedResets.

CIT has released a review of its restructuring plan threatening carnage if it does not pass. The PDF of the SEC filing is copy-protected, of course, because it’s SECRET, but they estimate recovery on unsecured claims – such as senior bonds – of between 5.9% and 37.2%. Ouch!

Carl Icahn estimates minimum 80% recovery if the firm is put into run-off; perhaps 100%.

In news guaranteed to amaze and astound, American financial institutions with severely restricted retention plans are having retention problems:

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg’s decision.

Isn’t that incredible? Who would ever have thought that employees had choices, or that there was any point to retention bonuses beyond the fun of doing evil?

The preferred share market had a respite from the steady drip of declines today, with PerpetualDiscounts gaining 6bp and FixedResets up 11bp. Volume was steady.