I Don't Want To Spoil The Party

I feel like a spoil-sport lately. I have been finding cracks in nascent economic optimism. I continue to warn about certain troubled banks and now I must rain on the parades of those celebrating the "rescue" of CIT Group.

Sadly, there is now rescue, merely a stay of execution. CIT's creditors have bought the company some time to do an debt for equity swap. What this means is that it is unlikely for ANY CIT bonds to mature at par. Instead, bondholders will be asked to accept CIT equity and a yet-to-be-determined ratio. A cramdown could be in the making. This occurs when an exchange is put to a vote among bondholders. If a majority of bondholders (usually two thirds or more) agree to an exchange, ALL bondholders are subject to the exchange. This is what the government tried to accomplish with GM, but bondholders said no and sent the company into bankruptcy.

For most investors the answer is simple. CIT bonds were purchased by most investors for reliable income with moderate risk. CIT bonds are now highly speculative and their income streams are very unreliable. I say to take the cash and move on.

Note: Citi W.I. common shares began trading in the OTC market today. The closing price was $2.57. This is roughly at parity with C preferreds likely to be exchanged. With the short squeeze abating, regular C common prices fell today. I have previously stated that due to the arbitrage and short squeeze present on C common that it was unlikely that it would trade at parity with the preferreds. I also said that if the spread between C common and preferreds narrowed, it could happen with the common price falling into line with the preferreds. The W.I. shares, immune from a short squeeze, are trading at parity to the preferreds. In essence, the common has move lower into parity with the preferreds. C W.I. shares (OTC symbol CTGGV) are a good indicator of where C common will trade post exchange