That’s probably what Bernanke did when they asked for another bailout. My god what a mess of a company this is.
On Monday the company announced they had reached a deal with bondholders and secured $3 billion in loans. The Journal is now reporting that CIT agreed to pay at least 13% in interest for the loan and that it’s still might not be enough prevent a bankruptcy filing. Shares were up 80% on Monday, down 25% today - this is fantastic volatility.
To add to the fun the company anticipates reporting a $1.5 billion dollar loss for the second quarter and a stress test done by the Federal Reserve Bank of New York found that it might need $4 billion more in capital. Their liquidity needs are plenty.
The CIT business model was to sell short term bonds and commercial paper and then loan out the money at higher interest rates. This required them to constantly access debt markets in order to roll over their short term obligations. When credit markets froze, so did their business. This would be the companies ninth consecutive quarterly loss. If that doesn’t spell winner, I don’t know what does [/sarcasm].
The long term viability of the company now depends upon bondholders accepting a tender offer that the company announced on Monday. The company would pay bondholders 87.5 cents on the dollar, cash, if they are willing to tender their notes. This should go through, as these are the same bondholders that just bailed out the company.
The real question is, where does the company plan on getting additional capital from? One answer might be it’s Utah bank. If the Federal Reserve allows it, the company can transfers it’s assets to the bank and use depositor money to make new loans. Although, considering the quality of their assets, this might not be the best idea. The bank itself could go insolvent and there’s a real fear it might be taken over the FDIC. Not to mention, no depositor in their right mind would be ok with this company lending out their money, so many depositors will probably pull their funds out.
The more likely option is the sale of assets and the sale of the bank. This would shrink down the company - deleveraging - and suck value away from current shareholders. They might also consider a debt for equity swap that would wipe out a lot of current value also.
Bottom line is that this company is a long ways from saved and has a strong chance of filing bankruptcy. The stock is volatile as all hell, which is perfect for strangling it.
I initiated another strangle on the company on Monday, I bought 10 August 2 Calls and 10 August 1 Puts.
I don’t mind holding on to this strangle for a while as I can see both sides of it being profitable at some moment in time. The bondholders have until August 17th to tender their shares, my options expire on August 21st, so I have a good time to hold.
I’ll be looking at doing some intra-day trading tomorrow to put some of my money to work in the shorter term, while this CIT mess sorts itself out.
Hope your all having a fun week so far.
Cheers,
Nik