PrefBlog

The Fed has announced a written agreement with CIT Group. Most of it is the usual regulatory ‘run your business properly and tell us what’s going on’ boilerplate (annoying and embarrassing, but it’s only paperwork) but there are some points of particular interest:

Within 15 days of this Agreement, Bancorp shall submit to the Reserve Bank an acceptable written plan (the “Capital Plan”) to maintain sufficient capital at Bancorp, on a consolidated basis, and at the Bank, as a separate legal entity on a stand-alone basis. The Capital Plan shall describe the specific actions that Bancorp proposes to take, and the timeframes for these actions. Within 15 days of this Agreement, Bancorp shall submit to the Reserve Bank an acceptable written plan (the “Capital Plan”) to maintain sufficient capital at Bancorp, on a consolidated basis, and at the Bank, as a separate legal entity on a stand-alone basis. The Capital Plan shall describe the specific actions that Bancorp proposes to take, and the timeframes for these actions. The Capital Plan shall, at a minimum, address, consider, and include:
…
(d) the source and timing of additional funds necessary to fulfill the consolidated organization’s and the Bank’s future capital requirements, as well as the impact that the actions to generate such funds will have on projected net income and retained earnings;
…
8. (a) Bancorp shall not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation (the “Director”) of the Board of Governors.
…
(c) Bancorp and its nonbank subsidiaries shall not make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Reserve Bank and the Director.

The agreement is dated August 12, so the Capital Plan must be in place by month-end. When announcing the agreement itself, CIT also announced a Rights plan:

adopted a Tax Benefits Preservation Plan (the “Rights Plan”).

While the Rights Plan will not impede the Company’s ability to pursue restructuring or strategic opportunities, it is designed to protect the Company’s ability to utilize its net operating losses and other tax assets, preserving value for the benefit of all stakeholders. This value could be reduced if the Company experiences an “ownership change” under U.S. federal income tax rules, which occurs if one or more “5% shareholders” (as defined under U.S. federal income tax laws) have aggregate increases of 50% in their CIT ownership over a three year historic period. The Rights Plan reduces the likelihood that CIT experiences such an ownership change by discouraging any person or group from becoming a “5% shareholder.”

Bloomberg reported on the Rights plan:

“By protecting these net operating losses, they’re preserving value for the estate should they see a bankruptcy or other types of restructuring,” CreditSights Inc. analyst Adam Steer said in an interview. “They’re trying to protect value, in this case, tax benefits, which is good, good for shareholders, and it would also be good for the bondholders and other creditors of the estate.”

Citigroup Inc., the third-biggest U.S. bank by assets, adopted a similar plan in June, and other companies including homebuilder Hovnanian Enterprises Inc. and Stamps.com have taken steps in the last year to limit the size of individual stakes. CIT said it would disclose the details of the plan in a filing with the Securities and Exchange Commission.

The plan would “deter in a pretty effective way the possibility of an ownership change” by activating the rights of existing owners to buy CIT stock at half its trading value — instantly forcing the new stockholder to “suffer a very serious and immediate dilution,” Willens said.

Yet another day of good returns for PerpetualDiscounts, slightly OK returns for FixedResets and good volume. This is getting BORING. Remember the good old days, when you were never sure whether the market would go down fifty cents or a whole dollar? That was exciting. Will somebody PLEASE go bankrupt and give me something to write about?

This entry was posted on Thursday, August 13th, 2009 at 8:16 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.