CIT 8.75% convertible preferreds would see favorable recovery in potential exchange, BofA says

By Rebecca Melvin

New York, July 15 - There is potential upside for CIT Group Inc. preferred holders given the possibility of an exchange offer that is likely to yield a better recovery than the current dollar trading value, according to Bank of America-Merrill Lynch research analyst Alan Yu.

"We reiterate our view that the dividends on the three outstanding CIT non-cumulative preferred stocks are vulnerable with or without a government bail-out," Yu wrote in a report published Wednesday.

Currently, CIT has a total of $1.075 billion par amount of non-cumulative preferred stocks held by public investors, plus about $2.1 billion of preferred stock issued to the U.S. Treasury, which in total are paying $183 million in annual preferred dividends.

"We note that the company has been issuing common equity to maintain the dividend payment in the past few quarters. Under a non-chapter 11 scenario, we think a distressed debt exchange and/or a preferred/common swap may take place. Participating debt investors and the U.S. Treasury (who owns preferred stocks) will likely require the suspension of the preferred dividends," the report stated.

Although a common/preferred swap won't directly resolve the liquidity shortfall, the Federal Deposit Insurance Corp. may still view the incremental common capital as a positive when assessing CIT's qualification for the government support program, the TLGP.

Past bank exchanges generally point to a modest haircut to the par value of the preferred stocks to be exchanged. This could provide some upside potential for CIT's preferred stocks in a similar exchange, since they are trading around 20% of par most recently.

For risk arbitrage investors, a potential concern is that stock borrow could get extremely tight as, based on assumed exchange details, common shares issuable for the exchange may account for more than 100% of CIT's current float of shares.

Trading of CIT Group's convertibles remained highly volatile as investors are yet to reach a consensus view on potential outcomes of the company's liquidity problem.

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