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CIT's Holdout Problem

posted by Stephen Lubben

So today word comes that CIT's bondholder-provided $3 billion of new financing will not solve its liquidity problems. That's not really surprising, given that CIT has $10 billion in debt maturing through the start of next year.

The more pressing issue is $1 billion of debt that comes due next month. CIT reportedly plans to offer the holders 83.5 if they tender now, and 80 if they tender later. They want to achieve a 90% acceptance rate.

You really could not ask for a better illustration of why out-of-court exchange offers so often fail. Obviously the best place to be is among the 10% of CIT bondholders who don't tender, because CIT will then be contractually bound to pay 100 in August. The problem being that if the 10% swells to 25% -- because everyone has the same bright idea -- the entire exchange offer will fail and CIT will end up in chapter 11.

And then there is the issue of those folks who take 82.5, only to find CIT in chapter 11 this winter. The other $9 billion of debt might want to have a word with them, especially if the filing comes within 90 days of the tender offer.



In a fair world, what you say would be true, but this is 2009.

More likely the guys who rescued CIT, PIMCO et al, hold a majority of the debt maturing in August already, which they purchased far below the 82.5 cents. So they are going to be able to recycle their money out through the bond exchange.

For eg, let's say PIMCO owns 200m out of the 1b coming due, and they purchased the 200m for 60 cents on the dollar. They would put in 600m of the rescue, and immediately get 165m back.

Plus they would have exchanged the 120m unsecured position for the 600mm secured 5x collateralized position.

It's actually fradulent conveyance, but legal in this case, unless other bondholders object later on.

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