CIT bondholders demanded ‘Don Corleone’ terms for cash
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The lifeline that Pimco and other bondholders of CIT Group Inc. threw the crumbling lender this week included terms so harsh they’d ‘make a pawn-shop operator blush,’ as one analyst put it.
From Bloomberg News:
Pacific Investment Management Co., Centerbridge Partners LP and the four other bondholders that put up $2 billion in financing for CIT Group made an instant $100 million on an investment analysts say is almost risk free. CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5% fee to the creditors and annual interest of at least 13%. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral. ‘The terms are egregious,’ said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. ‘They ripped the faces off everyone with these terms.’
The other debt holders providing the financing include two of Newport Beach-based Pimco’s Southern California rivals -- Capital Research & Management (which manages the American Funds mutual fund group) and Oaktree Capital Management, according to Bloomberg.
CIT, on the brink of failure, could hardly dictate its own terms for emergency financing. And the bondholders obviously are trying to protect their own investors.
Still, the bailout package was extraordinarily severe, critics say, based on the details in a CIT filing with the Securities and Exchange Commission.
From Bloomberg:
If CIT wants to retire the loan early, it must pay a 2% exit fee in addition to a prepayment premium of 6.5% on the amount it wants to reduce, the filing said. The 6.5% will decline to zero over 18 months. Even if CIT fails, the bondholder group will probably make money because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pa. ‘This is called Don Corleone financing,’ Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, ‘The Godfather.’ ‘You can’t lose money on this deal.’ Outside of the ‘urban underworld,’ Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. ‘These terms would make a pawn-shop operator blush.’
-- Tom Petruno