CIT filed for a pre-packaged Chapter 11 bankruptcy protection. This was not unexpected. It appears as though senior bond holders will get 70 cents on the dollar in new second lien secured notes (second claim on specific assets, probably receivables) and 30 cents in equity. Subordinate debt, preferred and equity holders are wiped out. This does not solve CIT's broken business model, but it may give them the breathing room to do so. The question is: What kind of revenues can CIT generate by focusing more on lending to higher-quality businesses and less to lower-quality businesses. Other firms are already courting CIT's better clients. Some have defected.
Don't feel too bad for institutional bondholders. Many will get par. How is that you say? Many bought credit default swap protection. As with the GM bankruptcy, bondholders buy default protection agree to compensation via a bankruptcy, deliver their bonds to whomever sold them protection, receive 100 cents on the dollar and leave the CDS seller to receive bankruptcy recovery. This is why bondholders would not agree to the bond exchange prior to bankruptcy. They needed a bankruptcy to receive par.
As part of its restructuring plan with the Her Majesty's Treasury, Royal Bank of Scotland agreed to suspend all dividend and coupon payments on its hybrid and preferred securities. It also agreed not to call any issues in. The time frame is two years. There are more details which can be found on HM Treasury's website, but the key here is that RBS and the British Government heeded the European Commissions wishes and suspended dividends. ING and ABN could take similar action. Their preferreds are not suitable for investors needing income.
One surprise came from the auto sector as GM and Ford unexpectedly reported profits. Now the annualized sales rate is over 10mm units nationwide. Unfortunately the Detroit makes need about a 16mm units sales U.S. sales pace to break into the black. Baby steps, I guess.
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