Friday, December 11, 2009
Back in August, I blogged about CIT, the middle market financing company which was facing trouble funding its operations. It was a case of an apparently solvent company with a flawed business model.
There was an interesting bond trade to be made, with CIT paper (many maturities and options) at below 70 cents on the dollar and as low as 45% for some maturities. It seemed like a decent wager at the time.
Well, after a relatively short 3 months, in which the company struggled with funding options, reorganization plans and dissident bondholders, and in the end settled for pre-packaged Chapter 11 bankruptcy, CIT emerged yesterday Dec 10 (after only 38 day in Chap 11). LINK.
My old bonds were replaced with new notes, laddered with maturities from 2013 to 2017 plus some NEW CIT shares. In all, the market value today of that package is about 80 cents of the original par value of the bonds. So, chapter 11 and all, if you tossed a few coins at this opportunity in August, today your bet is looking good.
However, if you opted for CIT shares, you came up with snake eyes. Those are worthless, as is the US government’s $2.3 billion TARP investment made in 2008. LINK.
And of course, if you are an original CIT note holder, you may not be happy looking at those 80 cents, but you’re still better off than having sold before Chap 11 and certainly happy you didn’t tender your bonds to Carl Icahn (who offered to buy them at 65 cents).
The point is that in bondland, default can mean many things, but not necessarily: “ you lost all your money”. So when you read about “default rates”, events may be included which may not be catastrophic. Chapter 11 can be a blessing.
Distress can be a synonym of opportunity, so don’t back down. But don’t be reckless and remember to spread it around.
Disclaimer: I already sold the shares, since I don't have a clear idea of how much the new reorganized company could be worth. The new bonds, which aren't your standard bonds (par value is $1 and interest is quarterly), have traded well, so I'll hang on to them for a while.