CIT Bondholder Pact Proves Life After Death With Markets Rescue
By Bryan Keogh
July 21 (Bloomberg) -- For CIT Group Inc., the emergence of a $3 billion loan agreement with bondholders preventing bankruptcy shows there is life after death in the credit markets.
While CIT, the 101-year-old commercial finance company, may not pose the level of systemic risk to the financial system of Lehman Brothers Holdings Inc., Bear Stearns Cos. or American International Group Inc., the bank’s rescue by investors instead of the U.S. government marks a milestone, said Rich Lee, managing director of fixed income at Wall Street Access, a broker-dealer in New York.
“Back in September, if a firm was struggling and was rumored to be running out of time and may have to file for bankruptcy, if the government didn’t come in they were done,” Lee said in a telephone interview. “Now there’s another option available to issuers, that they can go to bondholders and work out a deal.”
CIT, with almost $76 billion in assets, said yesterday that bondholders agreed to provide emergency financing, averting what would have been the largest bank failure by assets since regulators seized Washington Mutual Inc. in September. After seizing up last fall, credit markets are opening up, prompting a three-month rally that began in March and caused debt issuance to soar.
Companies have sold about $780 billion of U.S. dollar- denominated bonds this year, 11 percent more than the record pace set in 2007 as yields fell to the lowest relative to benchmark rates since before Lehman’s collapse in September.
TED spread
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, is about the lowest since April 2007, while the Libor-OIS spread, which measures banks’ willingness to lend to each other, is within 0.06 percentage point of the level former Federal Reserve Chairman Alan Greenspan said might mark a return to “normal.”
The TED Spread narrowed to 0.34 percentage point yesterday, down from a record 4.64 percentage points on Oct. 10 and 1.12 percentage point as recently as March. The Libor-OIS spread fell to 0.31 percentage point, the lowest since December 2007 and down from 1.08 percentage point in March. Greenspan said he would not expect a return to “normal” before markets reach 0.25 percentage point.
U.S. financial markets showed “noticeable” signs of improvement from March through June, according to a report by the Treasury, Federal Reserve and other regulators. While “strains in many financial markets persisted during the second quarter,” less pressure in short-term funding markets and rising stock prices show improvement, the quarterly report by the Financial Stability Oversight Board said.
Yield Curve
The gap between yields on 10-year Treasury notes and 2-year securities widened to 2.63 percentage points as of yesterday, up from 1.45 percentage point at the end of 2008 and within 0.18 percentage point of the record intraday high set six weeks ago, on optimism the economy is recovering. The so-called yield curve typically widens when investors anticipate a recovery because they demand more compensation for the risk that growth will spark inflation.
The U.S. economy, after contracting for four quarters in a row, will expand 1 percent in the three months ending Sept. 30 and 1.9 percent in the fourth period, according to as many as 72 economists surveyed by Bloomberg.
Secured Term Loan
CIT, led by Chief Executive Officer Jeffrey Peek, is receiving a $3 billion secured term loan with a 2.5-year maturity, the New York-based firm said yesterday. Loan proceeds of $2 billion are available immediately and the rest is expected within 10 days, the company said. CIT has $1 billion of notes that mature Aug. 17, and is asking investors to swap them for 82.5 cents on the dollar.
CIT will pay interest of 10 percentage points more than the three-month London interbank offered rate, people familiar with the matter said earlier yesterday. Libor, a lending benchmark, was set at 0.51 percentage point.
The rescue of CIT by bondholders may not mean the company will recover and avoid bankruptcy, said Adam Steer, an analyst at CreditSights Inc. in New York. It only “means they’re not going to file tomorrow,” he said.
The agreement emerged on July 19 after the U.S. declined to give the firm a second bailout on top of a $2.33 billion rescue from the Treasury in December, when CIT converted to a bank holding company to also be eligible to sell bonds backed by the Federal Deposit Insurance Corp.
‘More Stable’
The government’s unwillingness to provide further support “does suggest that they -- the Treasury, the FDIC, other regulators, the administration -- feel that conditions are much more stable and that the economy and financial system can digest a CIT failure,” Mark Zandi, chief economist at Moody’s Economy.com, said in a Bloomberg Television interview on July 17.
Yields relative to benchmark rates on everything from bonds to mortgages have plunged from record highs to about the lowest since Lehman filed for the biggest bankruptcy ever on Sept. 15.
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The extra interest investors demand to own corporate bonds rather than Treasuries of similar maturity fell to 4.52 percentage points, the lowest since Sept. 12 and down from a record 8.96 percentage points on Dec. 15, according to Merrill Lynch & Co.’s broadest measure of the debt.
Spreads Narrow
Spreads on high-yield, high-risk bonds fell to 9.36 percentage points on July 17, down from a record 19.7 percentage points on Dec. 16, according to Barclays Capital.
The FDIC, led by Chairman Sheila Bair, was unwilling to back CIT’s debt on concern that the guarantees would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.
CIT has said its bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents.
A CIT failure “would have been horrendous,” said Fred Joseph, managing director of Morgan Joseph & Co. Inc., a New York-based investment bank, and the former chief executive officer of Drexel Burnham Lambert Inc. “There is still a real credit crunch for mid-sized companies.”
Investors’ willingness to help shore up CIT demonstrates that they realize more than the government how important CIT and the financing it provides small businesses is to the U.S. economy, Joseph said in an interview.
To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net
Last Updated: July 21, 2009 00:00 EDT |
