s_m_p

CIT: A Turning Point in the Financial Crisis

Wow, this is the weakest analysis I have ever read. This is not a turning point by any means. What happened is you had a company with essentially ALL unsecured debt and NO restrictions in its debt on its ability to raise debt. Given that structure, bondholders holding large amounts of early maturing debt did the rational thing. They essentially swapped their unsecured early maturing debt for slightly longer term but secured debt -- secured, incidentally, by virtually all CIT's good unsecuritized loans according to published reports. This was such an obvious result. Are the credit markets thawing. Yes, they are. But the CIT deal is not indicative; rather, it is a deal that would have happened no matter what. Comparing CIT to Lehman is absurd. Lehman was a much larger company with a much much more complex balance sheet. Yes, CIT experienced a "bank run" as customers drew down credit lines but that is nothing like the instantaneous crippling effect on a trading company when your counterparties lose confidence in your liquidity.

Also, just in terms of the fact, CIT bonds were not really trading at 10 cents on the dollar on friday. As someone who just made a killing on this deal, I can tell you that the low prices quoted in papers were basically due to an extremely small number (in terms of volume) of retail investors mainly selling internotes for far far below market value. Sophisticated investors were never selling notes at 10 cents on the dollar.

Nor is this really great news for either shareholders or CIT customers. At best, it is mediocre news. Shareholders will still get completely raped at best in any debt for equity swap and any CIT customers who would have been affected by the bankruptcy will almost certainly not be given access to more credit anyway.

Searching for a Free Lunch, Banking Edition

Why not create an aggregator bank to buy assets but instead of offering banks a price for their assets which they could either accept or reject the government should establish a valuation procedure that is flexible enough to result in a range of valuations that encompass values above and below market value ie a standard based procedure not a formula. Banks would then have 30 days to either enter the program and agree to the valuation procedure or reject it in which case they would be barred from later participating. Effectively by creating uncertainy in the ultimate price that would be paid for toxic assets you would make banks have to think hard about not participating.

Will All Shipping Companies Suffer Equally?

Actually "patiency" isn't a word but good luck anyway. Genco is the only company I researched extensively and it is not looking good. See my prior comment under a Genco related post. To briefly summarize, Genco has a "$200 million" investment in Jinhui shipping that is actually only worth $20 million as far as I can tell. Over all I'd be worried that these companies will plunge further after a brief rally. When they do, I'd expect some to be taken private at rock bottom prices and shareholders completely screwed. Personally, I am waiting for some audited 10ks before I buy into any of these cos.

Looking Good: Genco in Particular, Shipping in General

I do not think that Genco is a good buy at this point. Their debt to asset ratio is way overstated in their latest 10Q IMO. I'm no maritime expert but it would surprise me if they could sell their ships for current book. Forget about that though. The HUGE red flat to me is their investment in a shipping company called Jinhui. Jinhui is a LTD traded on the Oslo exchange. A Hong Kong company owns 54%. Genco owns 15 million shares. Their latest 10Q puts a value on its stake of $200 plus million but that is based on September 2007 price. In fact, the current market price is closer to $20 million. Presumably for accounting purposes, management has recorded their stake as a "short term" investment but it is hard to reconcile that classification with their assignment of a $200 million value. At this point, I decided not to take a long position. Anyone thinking about doing so should figure out the implications of a write down of Jinhui to current value. For example, it wouldn't surprise me if that triggered collateral posting obligations under their 2007 credit facility.

Full Disclosure: I currently have no position in Genco. I may short the stock after further research.

Does Ackman and General Growth Properties Have Anything to Do with Target?

I only skimmed it earlier today but I think the 13d he filed specifically stated that he was trading and investing in the underlying debt. While it may have Target connection, it seems more likely that he is posititioning himself to help solve their "short term" liquidity needs (we'll see, of course, how short term they end up being) and get the equity upside.

Does Ackman and General Growth Properties Have Anything to Do with Target?

One correction (I think) at least based on my understanding. Citigroup was a counterparty to the cash settled equity swaps. Therefore, Citigroup's equity stake actually isn't necessarily a vote of confidence in General Growth. I believe it is more accurately seen as a hedge on their equity swaps with Ackerman.