Billionaire investor Carl Icahn on Tuesday offered CIT Group's small bondholders protection of the value of their debt if these investors support his effort to block the lender's reorganization plan.
New York-based CIT is scrambling to restructure its debt by getting debtholders to exchange their notes, or by agreeing to a prepackaged bankruptcy plan that would keep the company largely intact while cutting its debt. The company insists their offer is better than the alternative of bankruptcy.
Icahn, who snapped up CIT debt in the past few months and claims to be the lender's largest bondholder, has criticized CIT's plan. He argued the company's debt would be worth more if its assets allowed to run off under bankruptcy protection.
We're saying to small bondholders you can have your cake and eat it, too. You don't have to worry about their scare tactics, Icahn told Reuters in a phone interview. If it goes into freefall bankruptcy, we think that's good, not bad.
CIT on Monday extended and sweetened its debt swap offer to bondholders to get more participation.
To secure more investor support, Icahn on Tuesday announced in a letter that he would offer small debtholders the option to sell their debt to him for 60 percent of par value within 30 days of CIT's debt swap failing, but only if they vote against CIT's proposed restructuring.
Our tender offer provides downside protection to those noteholders willing to stand up to the company and reject their plan, he wrote.
In a second letter after the close of New York Stock Exchange trading, Icahn announced he had sent a letter to CIT offering to provide a new $4.5 billion term loan as an alternative to financing currently being arranged by Bank of America.
Jeffrey Werbalowsky, co-chief executive of investment bank Houlihan Lokey and adviser to CIT's bondholder steering committee, played down Icahn's offers.
The only reason to pursue this kind of tactic is you know you're going to lose on the merits. This only makes sense as a disruptive strategy when the vast majority of bondholders are voting to accept the prepackaged plan, he said.
CIT's bonds were mixed in secondary trading. Its stock plunged 11 cents, or 10 percent, to 96 cents.
The company's 5.2 percent bond due 2010 were unchanged at 62 cents on the dollar, yielding 60.65 percent, according to FINRA bond pricing service Trace. Meanwhile 7-5/8 percent bonds due 2012, among CIT's most actively traded bonds, fell 0.75 cents to 64.5 cents on the dollar, according to MarketAxess.
CIT, which for months has been trying to convince investors to support a reorganization plan, on Friday warned that if bondholders reject its latest proposals that it would have to liquidate. Sending the company into freefall bankruptcy, CIT said, would slash recovery value of its bonds to as little as 6 cents on the dollar and no more than 37 cents.
Icahn, on the other hand, said CIT's restructuring plan will reduce the value of the company. He complains the current board should not be allowed to remain in place after presiding over CIT's ill-considered expansion and then its demise.
He also took aim at the fees CIT would have to pay lenders, and its financial advisors. Icahn last week offered to underwrite a $6 billion loan to CIT at a lower cost.
Analysts at credit research firm CreditSights said opposition to the plan by Icahn and others make it unlikely CIT's proposals will be approved. They were also not convinced CIT, per its plan, could turn its business around by amassing deposits in its bank arm.
In our view, CIT, and bondholders, are better served if the company enters an orderly liquidation, CreditSights said in a report late on Monday.
For three decades, Icahn has made a fortune by snapping up stock or bonds in beaten down companies and using his position to get a seat at the table or loudly lobby for changes to boost his investment's value. Icahn told Reuters, though, he is not looking to run CIT.
We're not looking to take over the company; it's a huge company, he said. We have a large amount of debt, but we would not have that much equity in any plan. It would not be a large percentage, certainly under 10 percent.
Icahn contends that CIT's portfolios of loans and assets could deliver a recovery value closer to 85 cents if the firm were allowed to wind down under bankruptcy protection.
We have a good platform and if you could down the road sell that platform or put it into a bank, that would be great. But you can't just give these guys carte blanche.