spope33

Game Over, CIT

CIT was a good business, beaten down by circumstances and a few bad decisions, that they got out of. They were continuing to do business right, which is why I entered into a bond position with them, but on July 13 I bailed out. I could not believe the
market, even by Weds. 15, did not see what was going on. There was no way the administration would help out CIT bondholders. (Remember -- bondholders are "speculators".) I was amazed at the support levels for both the stock and bonds, through Wednesday,

CIT (CIT) says talks with government have ceased, and that it's been told there's no appreciable likelihood of support in the near term. Board and management are "evaluating alternatives." Trading in CIT halted late in the session.

Mark -- possible but the government cannot seize CIT Group like they did Washington Mutual Bank. (No legal authority.)

CIT (CIT) says talks with government have ceased, and that it's been told there's no appreciable likelihood of support in the near term. Board and management are "evaluating alternatives." Trading in CIT halted late in the session.

I expect the administration will provide DIP funding to CIT after the bankruptcy filing, and otherwise will act to preserve continuity of CIT's business operations particularly the factoring business. They were unwilling however to transfer taxpayer money to CIT bondholders.

Does Liquidating Bad Debt Start with CIT Group?

Back of envelope calculation:

Assume CIT assets of $75 are worth 50 cents on the dollar, or 38B. CIT has factoring liabilities of 9B, 3.5B of deposits in the banking company, 2.5B TARP, and owes 3B to Goldman, all of which get paid before the rest of the bondholders, so that leaves 20B for 50B of debt, so a recovery rate of 40% if done fairly. If there are parallels to previous deals they will get less than that from the administration say 30% - 35%. That could trigger a backrupcy filing from bondholders disappointed with the cramdown.

Of course the assets could be worth more than I assumed above.

Why the Fate of CIT All Comes Down to Politics

I can't really picture this administration intervening in CIT in a way that bails out the CIT equity holders (including bondholders), if there's any other way to do it that costs the taxpayers less. I think the percentage play is a prepackaged bankruptcy as opposed to a rescue.

Let CIT Fail: The Business Model Is Broken

It's ironic that the Feds compain about banks who take TARP money and just sit on it rather than lend it out, yes there is no positive response to a bank like CIT who does lend it out to average mainstreet businesses.

Like they say, no good deed goes unpunished.

GM Bondholders vs. UAW Retirees: False Equivalence

Whether it was unwise to invest half your savings in GM bonds, and how GM bondholders should be legally treated, are two completely unrelated questions.

On the former question, I would not have done it but it's not that uncommon for small investors to hold individual bonds. Bond funds are not automatically superior (just ask anyone who held Schwab YieldPlus). An investor tries to forsee future scenarios, including default scenarios but in this case there is no way an investor could have forseen the U.S. President intervening against them, as it is unprecedented.

At least the GM bondholders are being offered a better deal than was the case with Chrysler... it looks to me like the blowback from the administration's Chrysler moves has had some positive effect.

Are We Bailing Out GMAC Bondholders?

It's not necessary to consider too many subjective factors to determine whether bondholders are getting bailed out, are treated fairly, or are getting a raw deal.

Evaluate all the cash, new stock, and new corporate debt being given stakeholders who are lower priority than the bondholders. If this value exceeds the amount of money the U.S. and Canada has loaned the automaker pre-bankrupcy, then the bondholders are getting a raw deal (i.e. the low-priority, but politically-favored stakeholders are receiving more value than the government had to put up).

If this value is less than the amount the U.S. and Canada put in pre-bankruptcy, then the bondholders are getting a bailout.

If this value is equal to the amount the put in pre-bankruptcy, then the plan is fair to the bondholders.

Newer government loans to the post-bankruptcy entity don't affect the equation.

By this measure, I calculate the Chrysler bondholders were shorted by about 0.5 billion, and I haven't done the calculation for GM yet. Recent reports (UK Guardian) state the administration may be backing down and offering a fairer deal this time, given the poor reception and negative ramifications they had from the Chrysler deal.

What Were the People of California Thinking?

The public employee unions have California in a stranglehold and the taxpayers are quite rightfully resisting. You cannot put all the blame on the voters (although I personally voted for two of the revenue measures.) Some of the blame has to fall on the employees. (Most of it in my opinion, but even if one does not share that opinion, it is naive to hold them blameless.)

Who will win this game of chicken? In all likelyhood the employees, which is why they see no reason to give an inch given their golden staus if the administration intervenes.

The Chrysler Bondholders' Enviable Deal

There are so many statements requiring comment here I don't know where to begin.

Firstly, one of the first offers made by senior creditors was that they exchange their debt for 90% equity in the reorganized company. That was rejected, but it does show they would have accepted a controlling interest rather than cash.

Secondly, as for the "nobody else is getting cash" statement:

Employees are getting cash buyouts of up to $125K.

The plan "demands that retirees accept equity" only to the extent their qualified retirement plan is underfunded. It is only underfunded by about 20%. So they are accepting equity only for this shortfall, not the entire thing. Statements like the above make it sound as if retirees are losing their pensions. They are not -- most of their retirement is secured by plan assets, and most of the rest is backed by PBGA which pays in cash. Those pensions are 90% to 95% good.


(There are also apparently some non-qualified plans, such as deferred compensation, but they are a minor component .. usually those apply to higher-salaried white collar workers).

As for the VEBA plan, it is getting equity but it is also getting a note for $5 billion, at a high interest rate. Given the politics, that note is almost as good as cash.

Finally, last I heard all the creditors accepted the 2.25 billion offer so "they just want more cash" is no longer true.

I see the Chrysler deal as the prototype for any upcoming bankruptcies of states and their political subdivisions. All the same elements are there -- politically strong employee plans with funding shortfalls, and bondholders who won't be able to argue that they have any precedence in the context of controlling federal intervention. What does this mean for municipal bonds?

Ignore Detroit's Bondholders' Whines

An interesting (but not corroborated) report here:
"White House "Directly Threatened" Perella Weinberg"
www.businessinsider.co...


I'm developing a new theory as to why this went down the way it did: unlike unions, bondholders are passive players. They are not seen as doing anything; they normally just wait for coupon payments and don't even interact with management or labor. Bondholders are not seen as *working* to help dig Chrysler out of the hole it's in. My theory is this passive position worked agasint them; it made them seem more of outsiders -- to a group of negotiators not specifically skilled in corporate reorganizations.

Ignore Detroit's Bondholders' Whines

"I believe in union exceptionalism, just as the bondholder believe in bondholder exceptionalism"...
(just had to write that one down.)

Ignore Detroit's Bondholders' Whines

It is difficult to avoid the conclusion that the unions have been bumped up in precedence due to their relationship with the U.S. President, and the bondholders have been bumped down in precedence. Also Mark Roe (WSJ) made the valid point that those "majority" lenders who are agreeing to the larger Obama haircut are TARP recipeints and thus are entagled with the U.S. Treasury.

The fact that various bonds have traded at deep discounts is not a legal factor in bankruptcy. They were issued at par value with certain legal rights which is all that counts. If a union health plan has legal standing, as opposed to merely political standing, then that plan should be prepared to argue that case in court, rather than in the press or with the administration or with members of Congress.

Chrysler's Bankruptcy: Historic Changes for Markets?

The government wants credit markets to free up YET it is mistreating those who have conservatively lent money to banks, financials, and autos in the form of investment-grade bonds. And shouldn't it be enough to say "you lose your investment" without the all the vindictive negative rhetoric? The negative repercussions here will be long and deep.

Chrysler's Bankruptcy: Historic Changes for Markets?

The fundamental change in bond markets started with the September 2008 Washington Mutual Bank bankruptcy, in which without precedent the bondholders were excluded from the assets of the company. Notably an unsecured creditor, the deferred compensation plan, was made whole while bondholders were wiped out, contrary to precedence and normal sensibilities. Since WM was under federal regulation it may have seemed an anomaly at the time, but with Chrysler and GM the government seems equally determined to grab bondholder equity and hand it to lower-precedence parties-- Union health plans in this case.

So in an environment where we still have no universal healthcare, the government seems determined to fund the health plan of a privileged group, to do it with money it tries to take extra-legally from investors who had put up hard cash to fund a premier American employer's operations, and at the same time bad-mouthing the bond investors. If instead he would implement national healthcare there'd be no need to go through contortions to transfer wealth to the union health plan in the first place.

It is good that this one is ending up in court where the US President is not the ultimate decision maker.

Bad-mouthing bond investors! I have trouble believing it. People willing to accept modest returns and willing to take one a narrower risk than the average stock investor. Lots of retired folks have bonds from companies like GM or WM or Chrysler. Why is the union more important than them, other than pure politics??

Disclosure: I was wiped out on WM bonds, and exited a Chrysler bond position within the past year.