Distressed Debt Recommendations from Citigroup: AMERICAN GENERAL, CIT GROUP, CHEMTURA Corp., etc.
This past Tuesday, Citigroup’s distressed analysts presented their respective top picks to a large audience at the company’s high yield conference. As one would expect from a “flow shop” most of the names discussed were very high profile companies with large capital structures. While there were no “hidden gems” unearthed, their team did a great job of elucidating their points. The presentations opened my eyes (wider) to a couple of situations I had previously written off as not worth the trouble. The following is a list of their top picks with a brief synopsis of their thoughts.
AMERICAN GENERAL
Positive on the entire cap structure (bank debt YTM = 14.5%; bonds 13-14%)
Not just a sub-prime portfolio – had a different business than most because they knew they were keeping the loans being made
Thinks they are able to handle the July 2010 bank debt maturity through internal liquidity, bank group extension, or a loan/cash from AIG given the ILFC precedent
CIT GROUP
Like the steering committee loans because they have ‘B’ yields for ‘BB’ risk
Thinks the Series B Notes go to par upon emergence
Estimates $6 bln of book equity, which implies 18 points of additional bond value
New notes should return 20+% over next 6 months
CHEMTURA
Bonds trade at 107 area, downside is your claim
2016 Notes are structurally senior to other notes
IF EV > 1.2 bln then you get par on the 2016s
Upside comes from equity value
Risk is that you are taken out for cash or reinstated somehow
GM / MOTORS LIQUIDATION
(Note that GM bonds were marching up to 23 from 17 throughout this day)
Base case recovery is 29.5
Q3 #’s show they are ahead of plan
GM bonds cheaper than Ford equity
Macro bet on the economy
LEHMAN
(Citi’s analyst did an amazing job with this presentation. He gave out a 30 page slide deck that I would highly recommend for those with Citi coverage. The bullets below are from the first page alone!)
Resolution of Lehman’s many estates will be very difficult and there is no way to determine assets and claims with precision
However, there is enough information to set reliable ranges for many variables
Estimate base case recoveries of 25-32
Recovery is most sensitive to changes in asset value assumption, setoff and collection
Time to distribution and discount rate are next most important drivers
