Monday, July 20, 2009

CIT lifeline

CIT is about to get a $3 billion lifeline from it's bondholders in the form of secured debt. This hurts the current secured debt holders as they get diluted, but gives the unsecured debt holders some negotiating leverage.

CIT's business model is still broken, because unlike a bank they had heavily relied on the commercial paper market. That market is no longer there for them. To finance themselves with a deposit base (like a bank), CIT would need to build a branch network, but there is no time or the funds to do so.

To survive, CIT would need to roll it's unsecured debt, most likely below par. That is they would need to convert a dollar of unsecured debt into say 80c of secured. Current bondholders may accept this level of pain, given they already mark the debt way below par. That type of transaction might be doable with the $32 billion of unencumbered assets they currently hold. These assets would be used as collateral for the exchange (as well as for the $3 billion loan announced today).

CIT will also probably continue transferring more of the eligible (better quality) assets to their bank, in order to get more financing via wholesale term deposits (certificates of deposit) that would be FDIC guaranteed and much cheaper.