CIT Group Inc. failed to give due consideration to a $6 billion alternative debtor financing plan before accepting a more expensive offer, a group of spurned investors says.
The commercial bank, which made improvident investments in derivatives tied to the real estate market, faced the prospect of bankruptcy before striking a deal with six creditors for emergency financing.
The creditors involved included Allianz SE's Pacific Investment Management Co., Oaktree Capital Management LLC and Centerbridge Partners L.P.
Under the terms of that deal, CIT received $3 billion in loans at an interest rate of at least 13 percent and agreed to buy back $1 billion in outstanding bonds. It also paid $100 million in transaction fees and promised most of its assets as collateral.
The company is paying 5 percent on the $2.3 billion in taxpayer capital it received earlier this year under the Troubled Asset Relief Program.
But a better, less expensive option was available, says a different group of creditors.
"We never received a meaningful response to our proposal," Thomas Lauria, an attorney representing CIT investors holding approximately $2 billion in debt, wrote in a letter to CIT's board of directors.
According to Luria, his clients were willing to provide as much as $6 billion in immediate funding, also at a base interest rate of 13 percent. But the transaction fees would have been much less, 3 percent of the value of the deal versus 5 percent on the deal that CIT accepted.
The competing proposal also offered a lower exit fee, which CIT would have to pay if it repaid its loan before the term expired.
Having accepted a smaller financing package, CIT is now heavily reliant on the results of its debt buy-back program. The Wall Street Journal, which reported the contents of Mr. Luria's letter, said that so far "few of the bonds" had been tendered and that the company would extend its deadline for buying them back at its most attractive terms.
The commercial bank, which made improvident investments in derivatives tied to the real estate market, faced the prospect of bankruptcy before striking a deal with six creditors for emergency financing.
The creditors involved included Allianz SE's Pacific Investment Management Co., Oaktree Capital Management LLC and Centerbridge Partners L.P.
Under the terms of that deal, CIT received $3 billion in loans at an interest rate of at least 13 percent and agreed to buy back $1 billion in outstanding bonds. It also paid $100 million in transaction fees and promised most of its assets as collateral.
The company is paying 5 percent on the $2.3 billion in taxpayer capital it received earlier this year under the Troubled Asset Relief Program.
But a better, less expensive option was available, says a different group of creditors.
"We never received a meaningful response to our proposal," Thomas Lauria, an attorney representing CIT investors holding approximately $2 billion in debt, wrote in a letter to CIT's board of directors.
According to Luria, his clients were willing to provide as much as $6 billion in immediate funding, also at a base interest rate of 13 percent. But the transaction fees would have been much less, 3 percent of the value of the deal versus 5 percent on the deal that CIT accepted.
The competing proposal also offered a lower exit fee, which CIT would have to pay if it repaid its loan before the term expired.
Having accepted a smaller financing package, CIT is now heavily reliant on the results of its debt buy-back program. The Wall Street Journal, which reported the contents of Mr. Luria's letter, said that so far "few of the bonds" had been tendered and that the company would extend its deadline for buying them back at its most attractive terms.
published July 29, 2009, 0 Comments
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