CIT: A Win-Win Trade Idea

CIT (CIT) may get a deal done at the last minute or it may file for bankruptcy. Either way, you can go short the common stock and long the preferred shares, series C (CIT.C). If they file for bankruptcy, your preferred shares are likely worthless but you can be assured that so too will be the common, which is lower in the capital structure.

So if CIT goes bust, you shouldn't lose any money on the trade. If CIT cuts a deal, it's going to have to involve 1 of 2 things. Either they could be bought outright as is, in which case it's highly unlikely that the buyer would pay much more than it's worth today (say, a couple bucks at best). Meanwhile, in that instance, the preferred shares would instantly become good paper, soaring a couple thousand percent or so to a level closer to par and the overall trade profits handsomely.

More likely perhaps is the idea that CIT bondholders (and possibly preferred share holders) would swap their debt for equity, as we've seen all too often this year. This process would essentially dilute the current shareholders into oblivion as the debtholders will garner most of the equity, again creating value for the preferred shareholder before any chance of doing the same for the common.

In the second scenario, it's likely that the common shareholders get left with almost nothing while the preferreds could either become good paper, get equity in the company (certainly much more than the common holder would get) or get wiped out as well. The important thing is that if the preferred holder gets wiped out, so must the common, so again, the trade shouldn't lose any money in that scenario. All in all, a very high reward to risk ratio.

Disclosure: No position

Comments

[twhite113:]

Yeah, I love getting a borrow on $0.50 stock.

Jul 17 12:52 PM

[Paul Zimbardo:]

Not a good day to have picked for shorting CIT. Currently up 110% right now.

Jul 17 01:50 PM

[Trevor Phil...:]

The pref shares are up about the same so it wouldn't have caused much trouble. The only longer term risk to the strategy is that CIT not only survives, but without any dilution and then it goes up to 50 bucks/share. Then you'd lose on the trade overall.


On Jul 17 01:50 PM Paul Zimbardo wrote:

> Not a good day to have picked for shorting CIT. Currently up 110%
> right now.

Jul 17 02:38 PM

[paulseglund:]

With favored bankers GS & JPM talking to them, maybe a deal happens that is coerced by the government to save some face a la Bear Stearns.

Jul 17 06:14 PM

[RiskReturnO...:]

Buy CIT bonds at 30-50 cents, short common against it as hedge.

Jul 17 07:10 PM

[JOETRADER:]

Where do I pick the bonds up?


On Jul 17 07:10 PM RiskReturnOptimizer wrote:

> Buy CIT bonds at 30-50 cents, short common against it as hedge.

Jul 18 11:06 AM

[skwestorange:]

Seems like a better trade would be simply buy the preferred and sit on it. The max loss is capped and the potential gain could be very high

Jul 18 02:41 PM

[twhite113:]

The bonds you can buy in many eletronic brokerages - I use Fidelity - what I would like to know is where anyone can borrow the common.

Jul 19 09:59 AM

[RiskReturnO...:]

CIT bonds are still undervalued at 50 cents for 2012-2015 7.5% coupon ... yield to maturity around 20% ... not bad value considering common stock is shooting up to $1.4 at the moment ......

Jul 20 10:28 AM