Shares of CIT see-saw on reports of hedge fund merger talks, debt swap bid being readied
Associated Press
09/29/09 6:55 PM PDT
CHARLOTTE, N.C. — CIT Group Inc.'s shares soared Tuesday on a report that hedge fund manager John Paulson is considering merging the troubled finance company with failed mortgage lender IndyMac Federal Bank. But they plunged after-hours as a separate report said CIT is preparing a debt swap offer that could wipe out taxpayers' investment or could file for bankruptcy protection.
CIT Group, one of the nation's largest lenders to small and midsize businesses, spent the summer trying to stave off a potential collapse amid mounting loan losses and rising funding costs. It has been devastated by the downturn in the credit markets and is attempting to restructure its operations to remain in business. CIT in the past relied heavily on cheap, short-term debt to fund its operations — a type of funding that essentially evaporated during the peak of the credit crisis last year.
The financial firm, which received $2.3 billion in federal bailout aid last fall, received a $3 billion emergency loan in July from some of its largest bondholders and completed a debt repurchase program in August to help ease its cash crunch.
A story in the New York Post early Tuesday, citing people familiar with the matter, said a merger plan has been discussed among a number of CIT creditors, including Paulson, but is not part of any formal discussions between CIT and IndyMac. The plan, however, was one of several being considered ahead of a meeting Thursday of CIT's bondholders to discuss restructuring plans, the newspaper said.
Paulson, and his hedge-fund firm Paulson & Co., was part of the consortium that bought IndyMac from the Federal Deposit Insurance Corp. earlier this year, after the big California lender failed in July 2008. The Post said the plan would help IndyMac diversify its portfolio from mortgages to commercial loans.
The news sent shares of the New York-based company soaring nearly 32 percent to close the regular session at $2.20. That's up sharply from the 31-cent trough the stock reached in July, but still about a quarter of shares' value a year ago.
However, after the market closed, The Wall Street Journal reported online that CIT is preparing a debt swap offer that would wipe away 30 percent to 40 percent of its more than $30 billion in debt and give control to its bondholders, according to an unnamed person familiar with the situation. Such a scenario could mean that taxpayers would recover only a small amount of their $2.3 billion TARP investment, according to sources.
If enough bondholders didn't agree to such a plan, the paper said CIT could choose to enter Chapter 11 bankruptcy protection and reorganize its operations in court. In aftermarket electronic trading, CIT shares tumbled 60 cents, or 27.3 percent, to $1.60.
A spokesman for CIT Group declined to comment on both the Post and Journal reports.
