NOT AN ANALYST

Emergence from Bankruptcy The US Bankruptcy Court has approved today, December 8^th, the plan of reorganization that CIT Group proposed to its creditors. The Company is now expected to emerge from bankruptcy by mid-December. This is an overview on the plan of reorganization that CIT Group offered to different bond classes:

Series A and B Notes The company will issue two new notes in exchange for the old notes:

Characteristics: Series A note 7% coupon with maturities ranging from 2013 to 2017

Series B note 9% coupon with maturities ranging from 2013 to 2017.

Collateral: Series A and B are guaranteed by a lien on all CIT Group personal properties excluding interest in CIT Bank, certain equity interests in foreign subsidiaries (it’s unspecified which one) and other regulated subsidiaries.

Ranking: the collateral securing Series A and B notes is the same as the collateral securing the Senior Credit Facility but the lien of Series A and B collateral is subordinated to the lien of the Senior Credit Facility collateral.

Redemption: Each note will be callable @ 103.5 on Jan 1 2011 and @ 102 on Jan 2012 at the option of the issuer.

Covenants: The indenture of the new notes contain certain covenants that limit the Company’s ability to incur additional debt, pay dividends or repurchase debt or equity, merge with other companies, engage in transaction with affiliates.

Bond Classes Assuming holders of each bond class accept the plan, they will receive respectively:

Class 6 Letter of Credit – a payment of 103 cents on the dollar

Class 7 Canadian Senior Unsecured – 100% of series B note

Class 8 Long dated Senior Unsecured – 70 cents on the dollar of Series A note and 3.6% of new common interest

Class 9 Senior Unsecured – 70 cents of Series A note and 77.7% of new common interest

Class 10 Senior Unsecured Term – 70 cents of Series A note 1% of new equity common interest

Class 11 Senior Unsecured Credit Agreement – 70 cents of Series A note and 9.4% of new common interest

Class 12 Senior Sub – 7.5% of new common interest 

Class 13 Junior Sub- 0.8% of new common interest

Common interest will be cancelled and bondholders will own 100% of the post re-org company.

Post Re-org Price Class 9 holders are the largest creditors with 25,504 mm of principal outstanding and will own 77.7% of the post re-org Company. But how much is that percentage in share amount? The offering memorandum informs me that the estimated recovery on the note 94.4%, so if I am getting 70 cents on the dollar of the new note, there are still 24.4 cents that I am missing to arrive at the 94.4% recovery rate. The post- re-org equity will fill that gap. Assuming all bond classes accept the plan, the reorganized company will have 8,000 mm in equity, which is disclosed in the company memorandum, and will issue 200 mm in new shares to replace the current 400 mm shares outstanding per today’s press release. This will gives me a price of 40 per share. Is that reasonable? It is. If I am a buyer of all Class 9 debt, then I will get 155.4 mm shares of the new company (77.7% of 200 mm) and each Class 9 bondholder will get 6.09 shares which equals $240 (6 shares + cash). The math turns out perfectly, $700 of the new bond + $240 of new equity = $940 which is close to the recovery rate of 94.4% provided on the offering memorandum.

Series B notes There is a good chance that the Series B will go to par upon emergence. If you bought a Class 9 note in November at 70 cents on the dollar and you choose to participate in the plan of reorganization, you are definitely getting a great deal.

After 6 month of trading, your note can easily be trading par and the new equity at 50 per share, which gives you an annualized IRR of 17.5% without accounting for interest payments.