Why would CIT’s bondholders want assets transferred?

July 20, 2009
cit

I noticed an odd paragraph in this morning’s WSJ story on bondholder plans to rescue CIT:

CIT and its bondholders hope that their effort to stabilize the company will cause bank regulators to look more favorably on a CIT plan to transfer more of the company’s loans from the holding company to its bank in Utah. CIT has trouble borrowing money, but its bank can finance itself by taking in deposits. To transfer more assets to the bank, however, CIT needs an exemption from the Federal Reserve and a nod from the Federal Deposit Insurance Corp.

I understand why CIT would want to transfer assets to the bank, sort of.  Deposit funding is clearly much cheaper than other options they have.  Backed by FDIC insurance, deposits can be had at interest rates far below CIT could get in the bond market.

But as everyone points out, you can’t build a deposit base overnight.  Not unless you’re offering a high interest rate on brokered deposits, I suppose.  And FDIC will most certainly NOT let them do that.

But why would bondholders be in favor of a plan to transfer assets out of the holding company?  If those assets go to the bank, then they would back deposit liabilities.  Bondholders need those assets to back their debt.

Hmmm…..

Comments

CIT bank is nearly 100% brokered CD’s, and it would be interesting to see if the FDIC would block the plan on that basis alone.

Beyond that, they can’t just wave a wand and transfer assets to the bank willy-nilly. They have to send capital with the assets at a minimum of a 6% ratio (8% or higher if they want to try and keep the FDIC appeased), which in itself could prove problematic.

I think the “transfer assets to the bank” plan has to be in conjunction with a debt/equity swap. The bondholders get more than they would in BK, as equity holders they aren’t concerned about transfering assets to the bank, and whatever debt they still hold receives the benefit of improved liquidity (and possibly profitability). I haven’t crunched the numbers, but I could conceive of a situation where in as little as a couple years they’d actually see their equity stake be worth more than the par value of the debt.

Then, using the newly found capital from the D/E swap, they can funnel assets to the bank to the maximum that the FDIC is willing to let them bring in brokered deposits. Once the loan is in the bank, I believe that lowers some legal hurdles on product cross selling and gives CIT more leeway to lean on borrowers to do more deposit business with CIT (money markets and the like).

Posted by Andrew | Report as abusive
 

HELLO:
IM A BOND HOLDER WITH CIT AND WOULD LIKE SOMEONE TO PUT THIS IN PLAIN ENGLISH. I IKNOW THE LARGE BOND HOLDERS ARE PUTTING UP 3 BILLION AND GETTING 10 PERCENT BUT HOW CAN CIT PAY THAT KIND OF INTEREST AND WHAT ARE THE BONDHOLDERS LIKE MYSELF TO DO IN THE MEANTIME////

THANKS BOB MASTRO

 

Bob….many of the lenders putting up the $3 billion are invested in bonds that mature very soon. So they’re essentially putting up the money to pay themselves back.

CIT can’t pay 10% interest for very long before failing. This is just a stopgap intended to tide them over in order to give more time to unwind the assets. Or to make a play on a backdoor bailout via deposit insurance.

Can’t say I have any direct advice for you, as I’m not a credit analyst. Be on the look out for exchange offers that CIT will likely put on the table.

Posted by Rolfe Winkler | Report as abusive
 

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