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CIT: Ican Makes Bailout Offer, Egan-Jones Lobbies For Its Rejection

October 20, 2009

Here is a copy of the letter that Carl Ichan wrote to the CIT Board:


Board of Directors
CIT Group, Inc
505 Fifth Avenue
New York, NY 10017

October 19, 2009

Ladies and Gentlemen:

I am reaching out to you to address what I view as the latest example of incompetent and unconscionable behavior on the part of the Board of Directors of CIT. Specifically, I am referring to approximately $6.0 billion in a secured term loan currently being offered by the company. The economics offered to prospective lenders are well in excess of what the current syndicated loan market should dictate, given the loan’s collateral coverage. This loan is a bad-faith attempt to buy votes for the company’s Exchange Offer/Plan of Reorganization, since all prospective lenders must vote their CIT debt in favor of the company’s plan in order to receive an allocation of the new loan. The FDIC currently has a cease-and-desist order outstanding against your Utah Bank, and we would propose to issue our own cease-and-desist order against your rigging the voting process.

The Board of CIT, after years of mismanaging our assets, has over the past year pleaded with the government to bail them out. The government, after studying the problems at our company, flatly turned down the bail-out. So now the Board, in their wisdom, has determined to ask the unsecured creditors of CIT to bail them out by voting to approve a pre-packaged bankruptcy plan. The plan would, of course, give the Board releases against certain claims that shareholders and bondholders would have against them, and I believe there are many. Even worse, the plan would leave a majority of the existing Board, or their chosen successors, in control of our company for years to come. The company argues that they must stay in control because a change of control at the company might cause the Federal government to close down our very small bank. Interestingly, the government has already effectively shut down the bank by issuing a “cease and desist” order. Ironically, based on the actions of the government concerning our present Board, we believe that a complete change in the Board would be a positive, rather than a negative, factor in influencing the government to resuscitate our bank.

We agree with the Board on one thing, that CIT’s roughly $60 billion of assets should be allowed to be “run-off” or sold. However, as CIT’s largest creditor, we see no reason that the current Board (whose negligence created this mess in the first place) should continue to control our company. Furthermore, the Board would have us remain a bank holding company even though our banking operations are effectively shut down. The incremental value which may, hypothetically, be built through the bank several years down the road pales in comparison to the loss of value which would likely occur if this Board, like the proverbial fox in the henhouse, is left in place to manage our $60 billion in assets.

In the proposed plan to “bail-out” the Board at the expense of most bondholders, the new term loan would amend and increase the company’s existing $3.0 billion first lien secured facility and would result in term debt of approximately $9.0 billion. The term debt would be secured by a first lien on virtually all of the company’s unencumbered assets, which currently total over $30 billion. In exchange for committing to and funding the term loan, the company is offering prospective lenders a total of 5.0% in commitment and funding fees, for a total cost to the company of $300 million in addition to an interest rate of at least 9.50%. In light of the gross over-collateralization and rich pricing being offered to investors, we view this upfront payment as excessive. (By way of example, when the company arranged its $3.0 billion existing term loan in July, 2009, lenders were also paid 5.0% for their commitment in the form of original issue discount. Once freed to trade in the secondary market the loan immediately traded to approximately 105% of par, indicating that a 5.0% OID was far greater than what was necessary to syndicate the facility. While the structure and pricing for the two facilities differ somewhat, it is obvious to us that the company is once again destroying value.)

Were the transaction a simple financing with no requirements to vote in favor of the company’s proposal, we would attribute the exorbitant payment to continued incompetence on the part of a Board and management team which has brought the company to the brink of bankruptcy. (This new credit facility, the existing term facility and the Goldman Sachs swap financing completed in 2008 are only a few recent examples which demonstrate that those running the company are incompetent, or worse, when seeking funding in the capital markets — disturbing given that CIT is a financial institution for whom the capital markets are its lifeblood). However, what is even more reprehensible than the wasted money is that this money is being used to buy votes to entrench and protect the current Board.

We cannot sit idly by and watch you continue to destroy the value of the bondholders’ assets, in this case by outrageously overpaying fees in order to induce your largest bondholders to vote for a plan which benefits and leaves in place an entrenched Board of Directors in charge of our company following its restructuring or bankruptcy. We will vote on your plan at the end of the month and I call on you to make this a fair vote. As such, subject to documentation acceptable to us which could be done in a matter of days, we are prepared to underwrite an alternative term loan on substantially the same terms and conditions as the currently proposed Expansion Term Facility outlined in the term sheets dated and sent to us September 30, 2009, with two modifications: (i) we will charge a 1.25% commitment fee and a 1.25% funding fee, for a total of 2.50% (exactly 50% of the currently proposed fees), and (ii) we will not require an affirmative vote for the company’s Exchange Offer and/or Plan of Reorganization as a pre-condition to lenders participating in the financing.

We are eager to move forward on the financing, which will be offered to all bondholders. This will be a first step toward protecting the value of our assets. We look forward to working with you and your advisors to complete documentation for the facilities. However, if you do not wish to work with me because of our “strained relationship,” I am certain that there are a number of other banks who would also be eager to underwrite the financing, with large savings to CIT, as long as there is not a vote-buying condition.


Carl C. Icahn

In response to it, the New York Times is reporting that rating agency Egan-Jones has reacted negatively to the offer:

But Egan-Jones believes that CIT’s new exchange offer, as well as Mr. Icahn’s new loan offer, is inadequate and that bondholders should push the company into bankruptcy to recover more value. The firm’s liquidation analysis uses a value of 70 percent on CIT’s loans and creditors realizing 82.5 percent upon liquidation and 68.5 percent on a present value basis. The firm is urging bondholders to reject all deals below 90 percent of the face value of the bonds.

sean egan & bruce jones

Sean Egan & Bruce Jones - Founders of Egan-Jones Rating Agency


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