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By Ronald Fink
Carl Icahn's bid to force CIT to offer more equity to bondholders in exchange for debt has a good chance of succeeding, say analysts.
Icahn is offering to buy out subordinated bondholders of the $70 billion in assets lender to small and medium-size businesses for 60 cents on the dollar, according to published reports. That threatens to short-circuit management's own offer.
The company is trying to get the bondholders to exchange at least 66 percent of their holdings for equity, reducing its $42 billion in total debt by $5.7 billon and thereby helping to stave off liquidation. The company claims bondholders would get no more than 5.9 cents to 37.2 cents on the dollar through a Chapter 7 filing.
But Icahn insists such an offer is inadequate. He contends CIT is trying to coerce bondholders to swap their debt by saying they would get much less than what he believes their bonds are worth. He also offered CIT a loan of $6 billion last week.
Icahn is correct in arguing that CIT isn't offering bondholders enough, analysts at research firm CreditSights wrote in a note published late on Monday. "Suggesting this is the likely recovery range is a stretch at best," wrote CreditSights analysts Adam Steer and David Hendler. The analysts estimate bondholders' recovery rates would be somewhere in the mid-50s, and that they are therefore better off accepting Icahn's offer.
While that might yet lead to a Chapter 7 filing, the analysts said a Chapter 11 filing is still possible. And that, according to CreditSights, is likely to produce a better outcome for note-holders than CIT's offer.
"CIT, and bondholders, are better served by an orderly liquidation," they said. But with the company underestimating recovery values by assuming CIT would have to liquidate under Chapter 7, the analysts wrote that CIT is looking to "strong-arm" bondholders.
That echoes Icahn's contention, which he outlined in a release on Monday. "Our tender offer provides downside protection to those note-holders willing to stand up to the company and reject their plan in the face of the scare tactics being used by the company," he said.
Adding to pressure on CIT, CreditSight also noted the company has lost factoring customers to competitors, so management's revenue estimates may be overly optimistic. And the analysts insisted CIT's overall restructuring plan, which also asks senior unsecured lenders to exchange their holdings for longer-dated debt, is inadequate.
CIT's bonds declined on Tuesday. The company's 5.2 percent bond due 2010 fell almost one cent to 63.05 cents on the dollar, according to MarketAxess. Its stock fell almost 10 percent to 97 cents.
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