Cit Grp. Prfd Z (fka CIT-Z)

[Stock]

CIT Group bankruptcy and CIT-PZ

category: Investment Ideas

tags: Bankruptcy, CIT Group, CIT-PZ, Leverage

11.16.2009 6:37 pm

CIT Group Bankruptcy Overview On Nov 02, CIT Group and CIT Group Funding Company of Delaware LLC filed for chapter 11 Bankruptcy protection under the pre-packaged plan of reorganization. The conditions for the debt exchange offer were not met. CIT Bank was not part of the filing and will continue to operate regularly. Court proceedings should not take long and CIT Group is expected to emerge from bankruptcy by the end of the year or early next year. The firm is now trading under CITGQ.PK. I am skeptical about CIT Group’s ability to return to profitability even if the company is reducing its debt level and postponing maturities, since leverage remains elevated. In 2006, the company’s leverage was 12x operating earnings (EBITDA), in 2007 and 2008 it was 15x. Assuming operating earnings remain constant post re-org in 2010 at 4,260 mm; the company will be leveraged 9x, which it is still a high number. The credit rating that will be assigned after the company emerges from bankruptcy and the evolving of ongoing regulatory issues, the “cease and desist order” imposed by FDIC on CIT Bank, will be a key factor for the firm’s capacity to raise short term funds.

CIT Preferred Class Z While I was looking up and down the capital structure, I found out that a mandatory convertible preferred stock, CITEQ which was formally CIT-PZ, trades around $16, surprising for a preferred stock. The interesting part is that the security is actually benefiting from bankruptcy filing. Let’s take a closer look at it.

Corporate Units On October 17 2007, CIT Group issued 24,000 m of mandatory convertible preferred shares called “Corporate Units”. Each unit represents a 1/40 or 2.5% ownership interest in $1,000 principal amount senior note maturing on November 15, 2015 issued by CIT Group and is composed of a purchase contract which obligates the holder to purchase, no later than November 17, 2010, for a price of $25 in cash, a certain number of common shares.

Treasury Units Holders of a Corporate Units have the right to substitute, anytime before November 1st 2010 in integral multiples of 40, for Treasury Units which consist of an ownership interest in a $1,000 principal zero-coupon U.S. Treasury security (CUSIP No. 912820MJ3) maturing November 15, 2010. Each Treasury Unit is composed of a purchase contract which obligates you to purchase common shares under the same terms of a Corporate Unit Holder. More specifically, when the treasury security matures on Nov 15 2010, the proceeds are used to purchase common shares on Nov 17 2010.

Bankruptcy Clause The offering states that in the event of Bankruptcy, the obligation under the purchase agreement is terminated. You are no longer obligated to purchase common shares on Nov 17 2010, which could cause a huge loss at the current price, and can no longer create Treasury Units from Corporate Units either, because that was contingent to satisfying your obligation under the purchase contract.

Conclusion CIT-PZ is trading at $16, slightly below what holders are expected to receive from Bankruptcy, which is 70 cents on the dollar plus some unspecified equity interest like. If you are looking to buy senior unsecured bonds and participate in the restructuring, you should buy CIT-PZ because it has the same recovery rate as a Class 9 Senior Unsecured bond but it offers higher liquidity and better price.

Related posts on this Blog:

CIT Debt Exchange Set to Fail

http://www.notananalyst.com/2009/12/07/unlocking-general-growth-properties-equity-value/