CIT bondholders should sell or prepack-CreditSights

NEW YORK Oct 5 (Reuters) - CIT Group's (CIT.N) bondholders should sell their bonds, or choose the company's proposed prepackaged bankruptcy over its exchange offer, as the interest costs of the new debt is likely to weigh on CIT's business, according to analysts at CreditSights.

The lender to small and mid-sized companies last week proposed a debt exchange, but also asked bondholders to approve a prepackaged plan of reorganization if the exchange fails. For details, see [ID:nN01265054]

"We believe CIT's plan has very little hope of succeeding," CreditSights analysts said in a report on Sunday.

"Although the exchange could buy time for the company by moving its maturities into the future, without a means to generate additional liquidity to repay these maturities in the future, we believe CIT could be setting itself up for another liquidity crisis down the road," they said.

CIT wants to reduce its debt and essentially become a bank, though analysts have doubted the company will be able to achieve the investment grade ratings needed to provide economic funding needed to support the new business.

"Currently, CIT's interest expense is too high, it cannot borrow economically to fund new business, and its liquidity is stressed," CreditSights said.

If the bond exchange is successful, CIT's interest expense will remain elevated, at around $1.5 billion per year, because of the higher coupon on its bonds, they said.

The best option for bond investors is to sell their bonds, CreditSights said.

For those that retain exposure, they are better off choosing the prepackaged bankruptcy, in which unsecured debt will recover 70 cents on the dollar, than risk less in a prolonged bankruptcy, the analysts said.

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CreditSights believes that many of CIT's bondholders are unlikely to participate in the company's proposed exchange, making its success unlikely.

CIT has enough liquidity to repay its bonds maturing this year, making it likely that a number of the holders of the short-date debt would resist swapping for longer-dated bonds, the analysts said.

Holders of CIT's long-term bonds, meanwhile, which mature between 2013 and 2018, would be better off in the prepackaged bankruptcy, they said. This is because they would receive 70 cents on the dollar under both scenarios, but would be diluted in the exchange offer by short-term debt holders receiving more new debt.

Subordinated debt holders may also resist the exchange, as their holdings are significantly impaired in either situation.

"Taking the need for a high participation in the subordinated debt, along with the risk of short-dated bondholders holding out and long-dated bondholders better off with the pre-pack, we believe it is likely that the exchange fails," CreditSights said. (Reporting by Karen Brettell; Editing by Leslie Adler)