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Wednesday, July 22, 2009

Some Specifics on CIT’s Emergency Funding from PIMCO and Friends

The interest rate for the 2.5 year loan is set at 1000 bps over Libor, with Libor floored at 3%. That means the rate will be 13% annually, payable monthly, and will increase only after Libor rises above 3%. Libor is currently at .5%.

CIT will pay a 5% commitment fee when they draw on the funds. This amounts to the lenders buying a 13% floating rate bond at a 95 dollar price. Which comes out to a 15.4% yield at the current coupon.

The loan to CIT is collateralized with assets with a book value of at least 5 times that of the funds drawn from the facility and the collateral must maintain a fair value of 3 times that of the loan. This part of the agreement makes the emergency loan essentially risk free for the lenders. If CIT defaults, the lenders will receive the collateral, which I would assume the lending group would be alright with considering those terms.

Talk about being desperate. This deal sounds better than the Treasury’s Super Senior Preferreds.

Cliff J. Reynolds Jr., Investment Analyst

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